SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 0-14874
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
STATE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2846511
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
699 Hillside Avenue
New Hyde Park, N.Y. 11040
- ------------------- -----
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code (516) 437-1000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($5.00 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes |X| No |_|
As of March 20, 2000, there were 6,980,088 shares of common stock outstanding
and the aggregate market value of common stock of State Bancorp, Inc. held by
nonaffiliates was approximately $90,305,000 based upon the last trade per share
known to Management.
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STATE BANCORP, INC.
Form 10-K
INDEX
PART I Page
----
Item 1. Business
General 1.
Statistical Information 4.
Item 2. Properties 4.
Item 3. Legal Proceedings 5.
Item 4. Submission of Matters to a Vote of Stockholders 5.
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 6.
Item 6. Selected Consolidated Financial Data 6.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7.
Item 8. Consolidated Financial Statements and
Supplementary Data 7.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 7.
PART III
Item 10. Directors and Executive Officers of the
Registrant 8.
Item 11. Executive Compensation 8.
Item 12. Security Ownership of Certain Beneficial
Owners and Management 9.
Item 13. Certain Relationships and Related Transactions 9.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 9.
Signatures 13.
Exhibits
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DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the documents incorporated by reference and the parts of
the Form 10-K into which such documents are incorporated:
(1) The Annual Report to Stockholders for the year ended December 31,
1999. Referenced in Parts I and II of the December 31, 1999 Annual
Report on Form 10-K, Items 1, 5, 6, 7 and 8.
(2) The 2000 Proxy Statement, dated March 17, 2000. Referenced in Part
III of the December 31, 1999 Annual Report on Form 10-K, Items 10,
11, 12 and 13.
PART I
ITEM 1. BUSINESS
General
Incorporated herein by reference is the Company's 1999 Annual Report to
Stockholders. A discussion on the organization and nature of operations may be
found on page 18.
State Bancorp, Inc. (the "Company") was incorporated under the laws of the State
of New York on November 18, 1985. The acquisition by the Company of 100% of the
outstanding shares of State Bank of Long Island (the "Bank"), on a share for
share basis, was consummated as of the close of business on June 24, 1986.
The Company has no other subsidiaries and does not engage in any activities
other than acting as holding company for the common stock of the Bank. The
business of the Company is conducted through the Bank, which continues to
conduct its business in the same manner as it had done before the effective date
of the reorganization, except for additional offices established subsequently.
The Bank, therefore, accounts for all of the consolidated assets and revenues of
the Company.
1
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The Company is subject to supervision and regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended. The Bank is subject to periodic
examination and regulation by the State of New York Banking Department and the
Federal Deposit Insurance Corporation.
The Bank was organized in 1966 and is the only independent commercial bank
headquartered in New Hyde Park. It provides general banking services to
residents and businesses located substantially in the eastern end of Queens
County, Nassau County and the western end of Suffolk County. It offers a full
range of deposit products including checking, fixed and variable rate savings,
time, money market and IRA and Keogh accounts. Credit services offered include
commercial mortgages, commercial and installment loans, home equity lines of
credit, residential mortgages, letters of credit and auto loans. In addition,
the Bank provides merchant credit card services, access to annuity products and
mutual funds, a consumer debit card with membership in a national ATM network
and, through an alliance with U.S. Trust Company, the Bank also offers its
customers access to financial planning and wealth management services. The Bank
currently has ATMs at five of its nine branch locations. The Bank also offers
its retail customers the ability to verify their account balances, effect
transfers between accounts and access current deposit and loan rates through an
automated telephone voice response system. Commercial customers can also access
this same system or they may utilize Business Direct Access (BDA), the Company's
real-time cash management system. Through BDA, business and municipal customers
can perform all of the foregoing transactions as well as initiate wire
transfers, ACH payments and stop payment orders from a personal computer.
2
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There is strong competition in the area serviced by the Bank from branches of
several savings banks and savings and loan associations, as well as branches of
the major New York City banks. Of these, the Bank is considerably smaller in
size than virtually all of its commercial competitors, and approximates the size
of only one or two of its thrift competitors. Nonetheless, the Bank has
demonstrated the ability to compete profitably with larger financial
institutions.
The Bank's business is not of a seasonal nature nor does it depend on one or a
few large customers for its existence. The Bank does not have any foreign
commitments, with the exception of letters of credit issued on behalf of several
of its depositors. The Bank's nature and conduct of business have remained
unchanged since year-end 1995.
In 1979, the Bank established New Hyde Park Leasing Corporation to lease various
types of commercial equipment. During 1994, the Bank established SB ORE Corp. to
hold foreclosed property acquired in connection with extensions of credit. In
1998, the Bank established SB Portfolio Management Corp. and SB Financial
Services Corp. SB Portfolio Management Corp. manages a portfolio of fixed income
investments for the Bank while SB Financial Services Corp. provides balance
sheet management services such as interest rate risk modeling and
asset/liability management reporting along with general advisory services to the
Bank and each of its subsidiaries. SB Portfolio Management Corp. and SB
Financial Services Corp. are each based in Wilmington, Delaware. SB Portfolio
Corp.'s assets totaled $198,000,000 at December 31, 1999, which represents
approximately 21 percent of the assets for the consolidated entity.
Compliance with provisions regulating environmental controls will have no effect
upon the capital expenditures, earnings or competitive position of the Company.
The Company employed 219 full-time and part-time officers and employees as of
December 31, 1999.
3
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Statistical Information
Statistical information is furnished pursuant to the requirements of Guide 3
(Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933.
Incorporated by reference is the Company's 1999 Annual Report to stockholders.
The Company's statistical information may be found on pages 42 - 47.
ITEM 2. PROPERTIES
The main office of the Company is located at the Bank's main branch at 699
Hillside Avenue, New Hyde Park, N.Y. The lease on the land used by the Bank
expires on March 27, 2009 and contains an option to renew for an additional
ten-year period.
The Bank's lending division is located at Two Jericho Plaza, Jericho, N.Y. This
lease expires on March 31, 2007.
4
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The Bank operates full service branches at 501 North Broadway, Jericho, N.Y.; 2
Lincoln Avenue, Rockville Centre, N.Y.; 580 East Jericho Turnpike, Huntington,
N.Y.; 740 Veterans Memorial Highway, Hauppauge, N.Y.; 339 Nassau Boulevard,
Garden City South, N.Y., 135 South Street, Oyster Bay, N.Y., 4250 Veterans
Memorial highway, Holbrook, N.Y. and 27 Smith Street, Farmingdale, N.Y. The
Jericho lease expires on October 31, 2011 and contains a twelve-year renewal
option. The Rockville Centre lease expires on May 31, 2000 and has no renewal
options. The Huntington lease expires on December 31, 2003 and has one five-year
renewal option. The Bank's operations center is also located in the Huntington
facility. The Hauppauge lease expires on June 30, 2005 and contains two ten-year
renewal options. The Holbrook lease expires on October 31, 2002 and contains two
five-year renewal options. The Farmingdale lease also expires on October 31,
2002 and it has three five-year renewal options. The Garden City South and
Oyster Bay facilities are owned by the Company.
The fixtures and equipment contained in these operating facilities are owned or
leased by the Bank. The Company considers that all of its premises, fixtures and
equipment are adequate for the conduct of its business.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal proceedings,
other than ordinary, routine litigation incidental to the banking business. In
the opinion of management, liabilities, if any, resulting from these matters
would not have a material adverse effect on the consolidated financial
statements of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There were no matters submitted to a vote of stockholders during the quarter
ended December 31, 1999.
5
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Incorporated herein by reference is the Company's 1999 Annual Report
to Stockholders. The Company's common stock market data for the past
three years may be found on page 48 thereof.
(b) At December 31, 1999, the approximate number of equity stockholders
were as follows:
(1) (2)
Title of Class Number of Record Holders
-------------- ------------------------
Common Stock 1,300
(c) Annual cash dividends of 50, 49, and 40 cents per share, restated to
give retroactive effect to stock dividends and splits, were paid in
1999, 1998, and 1997, respectively. The Company paid a 6% stock
dividend in 1999, a 5% stock dividend in 1998 and declared a six for
five stock split in 1997. It is the Company's expectation that
dividends will continue to be paid in the future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(a) Incorporated herein by reference is the Company's 1999 Annual Report
to Stockholders. The Company's selected financial data for the last
five years may be found on page 1.
(b) Additional years are not considered necessary to keep the above
referenced summary from being misleading.
6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) Incorporated herein by reference is the Company's 1999 Annual Report
to Stockholders. Management's Discussion and Analysis of Financial
Condition and Results of Operations may be found on pages 29 - 41.
(b) There are no known trends or any known demands, commitments, events
or uncertainties which will result in, or which are reasonably
likely to result in, the Company's liquidity increasing, or
decreasing, in any material way.
(c) As of December 31, 1999, the Company had no material commitments for
capital expenditures.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference is the Company's 1999 Annual Report to
Stockholders. The Company's audited Consolidated Balance Sheets as of the close
of the last two years may be found on page 14. Reference again is made to State
Bancorp, Inc.'s 1999 Annual Report to Stockholders for the Company's audited
Consolidated Statements of Income, Cash Flows and Stockholders' Equity and
Comprehensive Income (Loss) for each of the three years in the period ended
December 31, 1999. These items may be found on pages 15 - 17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
7
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Incorporated herein by reference is the Company's 2000 Proxy
Statement, dated March 17, 2000. The identification of the directors
of the Company may be found on pages 13 and 14.
(b) Incorporated herein by reference is the Company's 2000 Proxy
Statement, dated March 17, 2000. The identification of the executive
officers of the Company may be found under "Principal Officers" on
page 2.
There exist no family relationships between any director or
executive officer.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the Company's 2000 Proxy Statement, dated
March 17, 2000. Management remuneration may be found on pages 3 and 4.
8
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the Company's 2000 Proxy Statement, dated
March 17, 2000. Security ownership of certain beneficial owners and management
may be found on pages 16 and 17.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the Company's 2000 Proxy Statement, dated
March 17, 2000. Certain relationships and related transactions may be found on
page 12.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Included in the 1999 Annual Report to Stockholders of State Bancorp, Inc.
and enclosed herewith, are the following financial statements and notes
thereon:
- Consolidated Balance Sheets as of December 31, 1999 and 1998.
- Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997.
- Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997.
- Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss)for the years ended December 31, 1999, 1998 and 1997.
9
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Notes to Consolidated Financial Statements
- Summary of Significant Accounting and Reporting Policies (1)
- Securities Held to Maturity and Securities Available for Sale (2)
- Loans - Net (3)
- Bank Premises and Equipment - Net (4)
- Other Assets (5)
- Lines of Credit and Borrowed Funds (6)
- Income Taxes (7)
- Incentive Stock Option Plans (8)
- Employee Benefit Plans (9)
- Commitments and Contingent Liabilities (10)
- State Bancorp, Inc. (Parent Company Only) (11)
- Financial Instruments with Off-Balance Sheet Risk (12)
- Disclosures About Fair Value of Financial Instruments (13)
- Regulatory Matters (14)
Independent Auditors' Report
Schedules are omitted because they are not applicable or because required
information is shown in the consolidated financial statements or the notes
thereto.
10
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(c) Exhibits
Exhibit
No. Item Method of Filing
- --- ---- ----------------
(3) Articles of incorporation
and By-Laws
a) Articles of Incorporated by reference from exhibit
incorporation B to the Company's Registration
Statement on Form S-4, file No.
33-2958, Filed February 3, 1986.
b) By-Laws, as amended Incorporated by reference from Exhibit
3b to the Company's December 31, 1997
Form 10-K.
(4) Instruments defining the Pages 22-28 of the above referenced
rights of security holders Registration Statement.
(10) Material contracts
a) Deferred compensation Incorporated by reference from exhibit
plan 10b to the Company's December 31, 1986
Form 10-K.
b) (i) Directors' Incorporated by reference from exhibit
incentive retirement 10c to the Company's December 31, 1986
plan Form 10-K.
b) (ii) Agreements of Incorporated by reference from exhibit
participants 10b (ii) to the Company's December 31,
surrendering their 1992 Form 10-K.
rights under the
directors' incentive
retirement plan.
b) (iii) Agreements of Incorporated by reference from exhibit
participants modifying 10b(iii) to the Company's December 31,
agreements described in 1995 Form 10-K.
item b) (ii)
c) 1987 incentive stock Incorporated by reference from exhibit
option plan, as amended 10c to the Company's December 31,
1991 Form 10-K.
d) 1994 incentive stock Incorporated by reference from exhibit
option plan 10d to the Company's December 31,
1993 Form 10-K.
e) (i) Change of control Incorporated by reference from exhibit
agreement no. 1 10e to the Company's December 31,
1997 Form 10-K.
e) (ii) Change of control Incorporated by reference from exhibit
agreement no. 2 10e to the Company's December 31,
1997 Form 10-K.
e) (iii) Change of control Incorporated by reference from exhibit
agreement no. 3 10e to the Company's December 31,
1997 Form 10-K.
e) (iv) Change of control Incorporated by reference from exhibit
agreement no. 4 10e to the Company's December 31,
1997 Form 10-K.
e) (v) Change of control Incorporated by reference from exhibit
agreement no. 5 10e to the Company's December 31,
1997 Form 10-K.
11
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f) State Bank of Long Incorporated by reference from exhibit
Island 401k retirement 10g to the Company's December 31,
plan and trust 1987 Form 10-K.
g) State Bancorp, Inc. Incorporated by reference from exhibit
employee stock 10g to the Company's December 31,
ownership plan 1987 Form 10-K.
h) Deferred compensation Incorporated by reference from exhibit
agreement 10h to the Company's December 31,
1995 Form 10-K.
i) 1999 Incentive Stock Incorporated by reference from exhibit
Option Plan 10i to the Company's December 31,
1998 Form 10-K.
j) 1998 Directors' Stock Filed herein.
Plan
(13) Annual report to Filed herein.
stockholders
(23) Independent Auditors' Filed herein.
Consent
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned.
STATE BANCORP, INC.
By: /s/ Thomas F. Goldrick, Jr., Chairman
-----------------------------------
Thomas F. Goldrick, Jr., Chairman
Date: March 28, 2000
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas F. Goldrick, Jr. Chairman of the Board 3/28/00
- --------------------------- (Principal Executive Officer) -------
Thomas F. Goldrick, Jr.
/s/ Daniel T. Rowe President 3/28/00
- --------------------------- -------
Daniel T. Rowe
/s/ Richard W. Merzbacher Vice Chairman 3/28/00
- --------------------------- -------
Richard W. Merzbacher
/s/ Brian K. Finneran Secretary 3/28/00
- --------------------------- (Principal Financial Officer) -------
Brian K. Finneran
/s/ Gary Holman Vice Chairman of the Board 3/28/00
- --------------------------- -------
Gary Holman
/s/ J. Robert Blumenthal Director 3/28/00
- --------------------------- -------
J. Robert Blumenthal
/s/ Carl R. Bruno Director 3/28/00
- --------------------------- -------
Carl R. Bruno
/s/ Arthur Dulik, Jr. Director 3/28/00
- --------------------------- -------
Arthur Dulik, Jr.
/s/ Joseph F. Munson Director 3/28/00
- --------------------------- -------
Joseph F. Munson
/s/ John F. Picciano Director 3/28/00
- --------------------------- -------
John F. Picciano
/s/ Suzanne H. Rueck Director 3/28/00
- --------------------------- -------
Suzanne Rueck
13
EXHIBIT (10) j)
1998 DIRECTORS' STOCK PLAN
Section 1. Purpose.
The purpose of the Director Stock Plan (1998) (the "Plan") is to promote
the success of State Bancorp, Inc. (the "Company") by providing a method whereby
directors of the Company who are not employees of the Company or any of its
affiliated companies and the Secretary to the Board of Directors of the Company
may be awarded additional remuneration for services rendered and thereby
increase their proprietary interest in its business and increase their personal
interest in the continued success and progress of the Company.
Section 2. Administration.
(a) Subject to the provisions of the Plan, the Board of Directors (the
"Board") of the Company shall have full power and authority to interpret the
provisions of the Plan, to establish, amend and rescind any rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for the administration of the Plan provided that the Board shall
have no discretion with regard to the selection of persons to receive awards
under the Plan, the number of shares subject to any award and the timing of any
such award.
(b) All decisions made by the Board pursuant to the provisions of the Plan
shall be final, conclusive and binding on all persons, including the Company,
stockholders, and participants.
Section 3. Shares Subject to the Plan.
(a) Subject to adjustments made pursuant to paragraph (c) of this Section
3, the aggregate number of shares of Common Stock, $5.00 par value, of the
Company ("Stock") in respect of which an award of share credits (each of which
shall be equivalent to one share of Stock) may be granted shall be 100,000.
(b) Any shares of Stock to be delivered upon payment of the awards granted
under the Plan may be made available either from authorized but unissued shares
of Stock or from shares of Stock reacquired by the Company, including shares
purchased in the open market.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, stock split, stock dividend, or other change in corporate
structure affecting the Stock, the aggregate number of share credits which may
be awarded under the Plan and the number of share credits subject to the awards
already granted under the Plan shall be increased or decreased proportionately,
as the case may be.
<PAGE>
Section 4. Eligibility and Extent of Participation.
(a) The persons eligible to receive awards under the Plan ("Eligible
Person") shall consist of each director of the Company (each, a "Director") and
the person then occupying the office of Secretary to the Board of Directors (the
"Secretary"), provided that any person who is an employee of the Company or its
affiliated companies shall not be an Eligible Person and further provided that
any person who has, within one year immediately preceding the determination of
such person's eligibility, received any award under any plan of the Company or
its affiliated companies that entitles participants thereon to acquire stock,
stock options, or stock appreciation rights of the Company or its affiliated
companies (other than any dividend reinvestment plan offered to shareholders of
the Company generally) shall not be an Eligible Person. Each holder of an award
granted hereunder shall hereinafter be referred to as a "Participant".
(b) Effective as of January 1 of each calendar year commencing January 1,
1999, each person who is an Eligible Person shall be granted an award of 100
share credits in respect of the preceding Award Year except that if the Eligible
Person was not a Director or the Secretary for all of such Award Year, the size
of the award shall be pro rated based on the number of months in such Award Year
during which such Eligible Person was either a Director or the Secretary. If an
Eligible Person retires, resigns, dies or otherwise ceases to be a Director or
the Secretary prior to the end of the annual meeting of stockholders of the
Company, there shall be granted, effective as of the first day of the month
after such person's termination of service as a director of the Company, an
award of 8-1/3 share credits for each month during the Award Year such was a
Director or the Secretary. For purposes of this Section 4(b), a part of a month
shall be treated as a month and an Award Year shall mean the period from January
1 of each calendar year (commencing Januray 1, 1998) to December 31 of the same
calendar year.
Section 5. Payment of Awards.
(a) As soon as practicable after a Participant has ceased being a Director
or the Secretary, or upon a Change in Control (as hereinafter defined), all
awards shall be paid to the Participant or, in the case of the death of the
Participant, the Participant's designated beneficiary or beneficiaries or in the
absence of a designated beneficiary, to the estate of the Participant, in a
single payment.
(b) (i) In addition to the payment provided for in paragraph (a) of this
Section 5, each Participant (or beneficiary) entitled to payment under this
Section 5 shall receive at the same time the dividend equivalent amounts
calculated under subparagraphs (ii) and (iii) below.
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(ii) The dividend equivalent amount is the number of additional
share credits attributable to the number of share credits awarded plus
additional share credits calculated hereunder. Such additional share credits
shall be determined and credited as of the end of each calendar year ending
prior to a Participant ceasing to be a Director or the Secretary by dividing (A)
the aggregate cash dividends which would have been paid had share credits
awarded or credited under this subparagraph (ii), as the case may be, been
actual shares of Stock on the record date for each such dividend during such
calendar year by (B) the average market prices per share of Stock on the last
trading day of each calendar month during the 12 months ending on the November
30 preceding the date such determination is being made. For this purpose, the
market price on any day shall be the average of the highest and lowest price of
Stock as reported on the composite tape for such day, unless the Board
determines that another procedure for determining market price would be more
appropriate.
(iii) The dividend equivalent amount for the year a Participant
ceases to be a director of the Company or the Secretary shall be equal to the
dividends that would have been paid in respect of such year prior to the
Participant ceasing to be a Director or the Secretary if the number of share
credits credited to the account of such Director or Secretary as of the end of
the preceding calendar year were shares of Stock.
(c) Payments pursuant to paragraph (a) and (b) shall be made in shares of
stock except that there shall be paid in cash the value of any fractional share,
the amount determined under paragraph (b) (iii) and the amount, if any,
determined under Section 7(e).
Section 6. Delivery of Shares.
No shares of Stock shall be delivered pursuant to any payment of an award
until the requirements of such laws and regulations as may be deemed by the
Board to be applicable thereto are satisfied.
Section 7. General Provisions.
(a) Designation of Beneficiary. Each Participant who shall be granted an
award under the Plan may designate a beneficiary or beneficiaries and may change
such designation from time to time by filing a written instrument of
beneficiaries with the Board on a form to be prescribed by it, provided that no
such designation shall be effective unless so filed prior to the death of such
Participant.
<PAGE>
(b) Except as may be permitted by Section 7(a), no award of share credits
nor any right to receive Stock hereunder shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge and any such attempted action shall be void and of no effect.
(c) No Segregation of Cash or Shares.The Company shall not be required to
segregate any cash or any shares of Stock which may at any time be represented
by awards, share credits or dividend equivalents. No Participant shall have
voting or other rights with respect to shares of Stock prior to the delivery of
such shares. The Company shall not, by any provisions of this Plan, be deemed to
be a trustee of any Stock or any other property, and the liabilities of the
Company to any Participant pursuant to the Plan shall be those of a debtor
pursuant to such contract obligations as are created by the Plan, and no such
obligation of the Company shall be deemed to be secured by any pledge or other
encumbrance on any property of the Company.
(d) New York Law to Govern. All questions pertaining to the construction,
regulation, validity and effect of the provisions of the Plan shall be
determined in accordance with the laws of the State of New York.
(e) Withholding of Taxes. The Company shall be authorized to withhold from
any payment due under this Plan the amount of withholding taxes, if any, due in
respect of an award of payment hereunder, unless other provision satisfactory to
the Company shall have been made for the payment of such taxes.
(f) "Change in Control", for purposes of this Plan, means an event of a
nature that: (i) would be required to be reported in response to Item 1 of the
Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results
in a transaction requiring prior approval of the Federal Reserve Board ("FRB"),
under the Bank Holding Company Act of 1956 and the regulations promulgated
thereunder by the FRB at 12 C.F.R. ss.225.11, as in effect on the date hereof or
(iii) without limitation, such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 20% or more of the Company's outstanding securities or
(B) individuals who constitute the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of a majority of the directors
<PAGE>
comprising the Incumbent Board, or whose nomination for election by the
Company's stockholders was approved by the Incumbent Board, shall be, for
purposes of this clause (B), considered as though he or she were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Company or similar transaction occurs
in which the Company is not the resulting entity; or (D) a proxy statement shall
be distributed soliciting proxies from shareholders of the Company, by someone
other than the current management of the Company, seeking stockholder approval
of a plan of reorganization, merger or consolidation of the Company or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to the Plan are exchanged for or
converted into cash or property or securities not issued by the Company; or (E)
a tender offer is made for 20% or more of the voting securities of the Company.
Section 8. Amendments, Suspension or Discontinuance.
The Board of Directors may amend, suspend, or discontinue the Plan, but
except as permitted by Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, may not make any amendment which operates (a) to modify the class of
persons who constitute Eligible Persons as defined in the Plan, (b) to increase
the total number of share credits or shares of Stock available for awards
granted under the Plan, or (c) to extend the period during which awards may be
granted under the Plan. The provisions of Section 4 may not be amended more
often than once every six months other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act of 1974, or
the rules under either such statute.
Section 9. Termination.
No award shall be granted under the Plan after expiration of ten years
from the date upon which the Plan is approved by vote of the Board.
[LOGO] STATE BANCORP, INC.
Customer Service
[PHOTO OMITTED]
Performance
Growth
Community
ANNUAL
------------99----
REPORT
<PAGE>
[LOGO] STATE BANCORP, INC.
State Bank of Long Island was founded in 1966 by an energetic group of
civic minded businessmen seeking to enhance the quality of banking services on
Long Island. They succeeded perhaps beyond their fondest expectations--and for
many years now State Bank has ranked among the highest performing banks in New
York State.
Over the years, the Bank has shown measured, orderly growth. By adhering
to that philosophy, the Bank has grown to be the largest independent commercial
bank headquartered in Nassau County. We have built a reputation for providing
high-quality personal service and have specialized in meeting the needs of the
commercial, small business, municipal and consumer markets throughout Long
Island.
- --------------------------------------------------------------------------------
[The following table was depicted as a bar graph in the printed material]
Ten-Year Net Income Trend
($ in Millions)
'90 ..................... $ 2.8
'91 ..................... $ 3.2
'92 ..................... $ 3.5
'93 ..................... $ 3.7
'94 ..................... $ 4.0
'95 ..................... $ 5.0
'96 ..................... $ 5.7
'97 ..................... $ 7.1
'98 ..................... $ 8.2
'99 ..................... $ 10.3
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
1 Selected Financial Data
2 Letter to Our Stockholders, Customers and Friends
5 Customer Service
12 Board of Directors
13 Financial Table of Contents
14 Consolidated Financial Statements
18 Notes to Consolidated Financial Statements
28 Independent Auditors' Report
29 Management's Discussion and Analysis of
Financial Condition and Results of Operations
42 Statistical Information
48 Market Data
49 Board of Directors and Executive Officers
50 State Bank of Long Island--Officers
52 State Bancorp, Inc. and Subsidiary Advisory Board
Inside Back Cover
Corporate Information
<PAGE>
Selected Financial Data STATE BANCORP, INC. AND SUBSIDIARY
- -------------------------------------------------------------------------------1
<TABLE>
<CAPTION>
------------
Fiscal Year Ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income ................................. $ 61,508,519 $ 54,769,164 $ 50,664,182 $ 43,178,725 $ 39,426,356
Interest expense ................................ $ 25,473,096 $ 24,164,086 $ 22,690,197 $ 19,130,627 $ 18,669,569
Net interest income ............................. $ 36,035,423 $ 30,605,078 $ 27,973,985 $ 24,048,098 $ 20,756,787
Provision for possible loan losses .............. $ 3,000,000 $ 1,800,000 $ 1,950,000 $ 1,500,000 $ 1,200,000
Net interest income after provision
for possible loan losses ...................... $ 33,035,423 $ 28,805,078 $ 26,023,985 $ 22,548,098 $ 19,556,787
Other income .................................... $ 2,146,042 $ 1,533,111 $ 1,634,299 $ 1,858,131 $ 1,424,147
Operating expenses .............................. $ 20,452,093 $ 17,967,483 $ 16,722,436 $ 15,536,513 $ 13,483,056
Net income ...................................... $ 10,328,708 $ 8,202,545 $ 7,105,490 $ 5,702,012 $ 5,038,665
- --------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share(1) .............. $ 1.48 $ 1.19 $ 1.05 $ 0.90 $ 0.84
Diluted earnings per common share(1) ............ $ 1.46 $ 1.17 $ 1.03 $ 0.89 $ 0.82
Stock dividends/splits .......................... 6% 5% 20% 8% 10%
Cash dividends per common share(1) .............. $ 0.50 $ 0.49 $ 0.40 $ 0.33 $ 0.39
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------------------
Total assets .................................... $949,829,410 $732,693,510 $738,088,937 $615,417,655 $650,950,468
Total loans(2) .................................. $488,948,385 $420,636,380 $377,633,267 $353,302,895 $287,578,741
Total deposits .................................. $804,462,926 $597,020,948 $611,227,920 $474,450,489 $497,739,954
Total stockholders' equity ...................... $ 56,103,097 $ 60,857,892 $ 54,930,263 $ 48,569,471 $ 40,587,552
Weighted average number of common
shares outstanding(1) ......................... 6,962,772 6,866,256 6,755,113 6,362,782 6,017,206
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
- --------------------------------------------------------------------------------------------------------------------------------
Return on total average assets .................. 1.23% 1.11% 1.05% 0.97% 0.94%
Return on total average
stockholders' equity .......................... 17.35% 14.16% 13.76% 12.98% 13.11%
Operating efficiency ratio ...................... 51.7% 54.4% 54.8% 58.1% 58.1%
Dividend payout ratio ........................... 33.43% 40.77% 37.56% 37.37% 46.72%
------------
</TABLE>
(1) Retroactive recognition has been given for stock dividends and splits.
(2) Net of unearned income.
<PAGE>
To Our Stockholders, Customers and Friends:
- -------------------------------------------------------------------------------2
The start of each new year is invariably filled with a good degree of excitement
and anticipation of what is to come in the months ahead. This is more evident
than ever before as we begin the year 2000 and all of us, together, begin our
journey into the new millennium. We at State Bancorp are able to look forward to
this much heralded year with a considerable measure of pride, having closed the
1990's with our most successful year to date, and our twenty-ninth consecutive
year of record earnings. We are delighted to be able to report to our many
friends on our success of the past year, and our attainment, once again, of
record levels of growth in loans, deposits, and Tier I capital. These are all
significant milestones which the entire State Bancorp family, past and present,
can look upon with enormous pride and sense of accomplishment as we enter this
historic year 2000.
As we are all well aware, the year 1999 brought with it a continuation of
the strong growth we have been experiencing in the Long Island economy. Many of
the sector components so critical to creating solid, sustainable growth in our
economy demonstrated continued vitality in the past year, most notably in the
areas of employment, real estate and the increasingly important service and
technology sectors. As we have noted previously, we are well aware that such
strength, while showing great resiliency, likely cannot endure indefinitely and
consequently we will always closely monitor the ongoing condition of our Long
Island economy, of which we are so very much a part.
Turning to our financial results for 1999, we are once again delighted to
be able to report a very significant increase in net income--25.9%--to yet
another record level of $10.3 million or $1.48 per share for the year 1999. As
noted above, this is now our twenty-ninth consecutive year of earnings growth
and we continue to believe that this is an achievement unique among our peers,
both locally and on a national scale as well. This is truly a remarkable record
which has been sustained throughout numerous business cycles, and we express our
deep appreciation to all of our stockholders, customers and friends for making
this possible. We should all be very proud indeed.
[The following table was depicted as a bar graph in the printed material]
Net Income
($ in Millions)
'95 ..................... $ 5.0
'96 ..................... $ 5.7
'97 ..................... $ 7.1
'98 ..................... $ 8.2
'99 ..................... $ 10.3
More specifically, with regard to 1999's financial highlights, the
Company's return on assets improved to 1.23% and return on equity also improved
markedly to a level of 17.35%. We are very pleased with the continual increases
of both of these profitability indices. Similarly, we are pleased to report
strong growth in several critical components of the Company's balance sheet.
Deposits increased by nearly 35% during the year, while loans outstanding were
up by more than 16% as compared with 1998. Additionally, stockholders' equity
grew at a year-to-year rate of 12.1%, excluding portfolio valuations related to
SFAS No. 115. Finally, the Company's capital ratios continued at levels well in
excess of federal regulatory criteria for well-capitalized institutions, with
our Tier I leverage ratio at a very solid 7.02%. The continuing growth in the
financial strength of our Company has certainly created a most secure foundation
as we move into the new millennium.
[The following table was depicted as a bar graph in the printed material]
Total Average Assets
($ in Millions)
'95 ..................... $ 537.2
'96 ..................... $ 588.4
'97 ..................... $ 678.4
'98 ..................... $ 740.2
'99 ..................... $ 841.5
For a more detailed analysis of the consolidated financial statements,
please refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations found on page 29 of this report.
During 1999, we were able to devote considerable resources to the updating
and enhancement of our Company's strategic plan, Mission 2000. You may recall
that back in 1993, we developed Mission 2000 in order to create a strategic
vision of what our Company might look like in the year 2000. The financial
aspect of this plan contemplated an institution of $1 billion in assets and $10
million in net income at the close of the year 2000. We are most pleased that we
have been able to reach the $10 million income threshold a year ahead of
schedule, and while assets are not yet consistently at the $1 billion level, we
expect that this goal, as well, may well be realized
<PAGE>
- -------------------------------------------------------------------------------3
[PHOTO OMITTED]
(from left to right)
Richard W. Merzbacher
Vice Chairman
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
Daniel T. Rowe
President
<PAGE>
- -------------------------------------------------------------------------------4
ahead of schedule. Of course any strategic vision requires continued updating,
and it was to this end that we devoted significant time and effort during the
latter part of the year just ended. I am pleased to report that our strategic
plan has now been contemporized and adopted by our Board of Directors, and will
provide us with the strategic vision necessary to successfully guide us through
the early years of this decade.
[The following table was depicted as a bar graph in the printed material]
Return on Average
Stockholders' Equity
(%)
'95 ..................... $ 13.11
'96 ..................... $ 12.98
'97 ..................... $ 13.76
'98 ..................... $ 14.16
'99 ..................... $ 17.35
During the year ahead, we look forward to many exciting developments
within our Company. On the technology front, we had a very smooth passage into
the year 2000, and we now eagerly anticipate the completion of our Check Imaging
project during the first half of the year. This state-of-the-art service will
provide all of our customers with a clear and precise image of their monthly
statements and checks and will greatly facilitate the reconciliation, record
keeping and retention of financial records. In addition, account research and
customer request handling will be greatly enhanced in each of our branches,
providing our valued customers with the very highest level of service and
product integrity available in the banking industry today. We look forward with
much enthusiasm to this very significant advancement in state-of-the-art
technology.
We are further pleased to report on the continuing expansion of our
Delaware subsidiaries, SB Portfolio Management and SB Financial Services. The
growth of both of these subsidiaries has necessitated a significant expansion of
our Delaware facilities. We look forward to further growth in the years ahead as
these subsidiaries continue to develop and enhance the consulting services they
provide in both portfolio management and asset and liability management,
employing the most advanced financial modeling techniques and technologies
presently available.
We again would like to bring to the attention of our Stockholders our
Dividend Reinvestment Plan, which continues to afford our Stockholders the
opportunity to reinvest their cash dividends into Company stock. Since its
inception in 1993, this Plan has been exceptionally well received and has served
to contribute nearly $5 million in capital toward the continuing growth of our
Company. We have attached a perforated card in this report should you wish to
become a participant in this highly regarded program.
Once again, the untiring efforts of both our Board of Directors and our
Advisory Board have contributed greatly to the successes enjoyed by our Company
over these many years. We believe that each of our Directors and Advisory Board
members contribute significant business strengths to our Company and constitute
a diverse group of professionals representing a broad cross-section of our Long
Island business community. A roster of our Board of Directors and Advisory Board
members, together with their respective business affiliations, appears on pages
49 and 52 of this report.
The year 1999 was one of significant accomplishment for all of us here at
State Bancorp and State Bank of Long Island. It is with eager anticipation that
we now look forward to the new millennium with all of the challenges and
opportunities it will present for our Company. We are confident that the years
ahead will bring us even greater successes, as we continue to serve the people,
businesses and governments of our Long Island marketplace, as the region's
pre-eminent independent commercial bank.
Sincerely,
/s/ Thomas F. Goldrick, Jr.
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
/s/ Richard W. Merzbacher
Richard W. Merzbacher
Vice Chairman
/s/ Daniel T. Rowe
Daniel T. Rowe
President
<PAGE>
[LOGO] Customer Service
- -------------------------------------------------------------------------------5
According to the consulting firm Peppers & Rogers Group, the quintessential
definition of any business's ultimate reason for being is satisfying customer
needs. This was true before the days of Julius Caesar and will be true a
thousand years from now. Everything else that we do--production, engineering,
accounting, logistics--everything other than satisfying a customer's need is
just cost.
At State Bank of Long Island, this simple axiom of knowing and satisfying
customer needs has been a cornerstone of our business philosophy and a major
reason for our unparalleled success in the Long Island marketplace. It is an
intangible attribute that we thought could best be explained by those with
responsibility for delivering it--our account officers. And, since it is the
customer who, in the final analysis, decides if any benefit is real, we have
included a sampling of their evaluations of our service.
Account Officer: Kevin T. Hennessy, Vice President.
Customer: Official Offset Corporation.
[PHOTO OMITTED]
Kevin T. Hennessy, Vice President, Commercial Lending Division.
[PHOTOS OMITTED]
Philene Paulino, Vice President, Official Offset Corporation; Frank Paulino,
Vice President, Official Offset Corporation; Ben Paulino, President, Official
Offset Corporation; Kevin T. Hennessy, Vice President, SBLI.
<PAGE>
[LOGO] Customer Service
- -------------------------------------------------------------------------------6
"Effective customer service starts with taking the time and effort to know your
customer and his/her industry and then acting in their and the Bank's best
interest," says Kevin Hennessy, Vice President and Commercial Lending Officer.
"We recognize that we cannot be everything to everybody, but our responsiveness,
follow-through and flexibility gives us a clear advantage over all our
competition--big or small."
The sincerity and integrity that Kevin brings to each of his customers has
helped foster many long-term relationships with companies like Official Offset
Corporation, Amityville, New York. Official Offset is a commercial printing
company that provides a full range of printing services from typesetting and
lithography to six color runs of any size. Over the years, Official Offset has
expanded their loan relationship with the Bank to include a line of credit and
equipment financing. In addition, they have also established several business
and personal deposit relationships that includes two generations of ownership.
- --------------------------------------------------------------------------------
"State Bank has been very responsive and has found the most beneficial and
economic ways to help finance our growth. They have also assisted in the
transition of ownership from myself to my children, thereby assuring our future
prosperity."
Ben Paulino, President,
Official Offset Corporation
- --------------------------------------------------------------------------------
Account Officer: Iris Taibbi,
Manager, MacArthur Branch.
Customer: J. Petrocelli Construction, Inc.
"Our dedication to building customer relationships begins with a total
commitment to personalized service by the entire staff and by our ability to
deliver a full line of tailored financial products. It is our practice to know
all our customers by name, and always, always to treat each customer as if they
were our only customer. We know we are doing the right thing when our current
customers routinely bring new business to us," says Iris Taibbi. "We treat
customers as guests when they come and when they go, whether they buy something
or not."
J. Petrocelli Construction, Inc., Ronkonkoma, New York, has a full banking
relationship with Iris's MacArthur Branch, including loans, business checking,
personal accounts and various other products to assist their business. John M.
Petrocelli, Sr., whose ideas on quality and service have made the company one of
the most respected firms in the construction industry today, founded J.
Petrocelli Construction in 1959. This family business is well known for the
skill and craftsmanship that goes into every project whether it's a new
building, a renovation, an addition or an alteration. They are dedicated to
making concepts a reality--on time and within budget.
- --------------------------------------------------------------------------------
"We are very happy with our banking relationship with State Bank. The idea of
banking with a community bank that offers so much value to us is something we
thought did not exist anymore. This is a partnership that will assist us in our
growth."
John and Joan Petrocelli
J. Petrocelli Construction, Inc.
- --------------------------------------------------------------------------------
[PHOTO OMITTED]
Iris Taibbi, Branch Manager, MacArthur Branch.
<PAGE>
[PHOTOS OMITTED]
John and Joan Petrocelli, along with their four sons, John Jr.,
Jerome, Joseph and Jim greet Iris at their corporate office.
<PAGE>
[LOGO] Customer Service
- -------------------------------------------------------------------------------8
Account Officer:
Maria Billiris, Commercial Loan Manager, Commercial Lending.
Customer: Castella Imports, Inc.
"There is an alliance that develops between banker and client that
is based on trust, honesty of purpose and working together to achieve mutually
compatible goals. For us, it begins by gaining an understanding of our
customer's needs and financial goals and then delivering solutions that will
make a difference to the client. At State Bank, we are not encumbered by excess
layers of management and we have the ability to respond quickly to any inquiry.
I make myself available to clients at any time--after all, their success is our
success and vice versa," states Maria Billiris.
Castella Imports, Inc., Farmingdale, New York, is one of the largest importers
of specialty foods in America. They manufacture, package and distribute a wide
array of products including spices, olives, olive oil, nuts and fine foods to
retail and wholesale outlets across the country. State Bank has provided the
financing which has enabled the company to expand almost from its inception. It
is a long-term financial partnership that will continue to grow well into the
new millennium.
[PHOTO OMITTED]
Maria Billiris, Commercial Loan Manager, Commercial Lending Division.
- --------------------------------------------------------------------------------
"As a growing business, Castella Imports' financial needs are met with the
hands-on approach and dedication we expect. The State Bank family has provided
the personal attention needed for our firm to operate more effectively and
continue to grow for years to come."
Anastasia Valsamos
Manager,
Castella Imports, Inc.
- --------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------9
[PHOTO OMITTED]
Maria Billiris, Commercial Loan Manager, SBLI; Anastasia Valsamos,
Manager, Castella Imports, Inc., at their new Farmingdale facility.
<PAGE>
[LOGO] Customer Service
- ------------------------------------------------------------------------------10
Account Officers:
Robert J. Valli,
Senior Vice President, Municipal Banking.
Ken Messina,
First Vice President, Municipal Banking.
Customer: Incorporated Village of New Hyde Park.
"Over the years, State Bank has developed a unique and very successful
Municipal Banking program that extends well beyond the reach of our branches.
Our Municipal Banking Group has a "team" mentality which provides constant
backup when servicing our customers. We make a special effort to not only
provide the best financial services for our municipal customers, but we build
warm, personal relationships with municipal staffers at all levels. Every
municipal relationship is important to us, and we want them to know it. Also, we
have the flexibility to respond to municipal needs in a timely and meaningful
manner," says Bob Valli, Senior Vice President, Municipal Banking.
The Village of New Hyde Park has maintained a banking relationship with State
Bank for almost 20 years. Municipalities require special financial
considerations due to their unique structure and fiduciary responsibility to
taxpayers. State Bank is well versed in these special requirements and, in
addition to providing basic deposit services, aggressively bids on Certificates
of Deposit and short-term debt.
- --------------------------------------------------------------------------------
"Most banks talk about personal service but can't deliver it on a consistent
basis. State Bank always provides prompt, efficient and friendly service at
every level. You feel as if you are a family member and, in a way, you are."
Roy Biehayn, Village Clerk,
Incorporated Village of New Hyde Park
- --------------------------------------------------------------------------------
[PHOTOS OMITTED]
Ken Messina, First Vice President, Municipal Banking, SBLI; Bob Valli, Senior
Vice President, Municipal Banking, SBLI; Roy Biehayn, Village Clerk,
Incorporated Village of New Hyde Park.
[PHOTOS OMITTED]
Bob Valli, Senior Vice President, SBLI; Ken Messina, First Vice President, SBLI.
<PAGE>
- ------------------------------------------------------------------------------11
[PHOTOS OMITTED]
Fred A. Heruth, First Vice President, SBLI; Peter Schwing, Schwing Electrical;
Jack Dunigan, Schwing Electrical; Charles W. Schwing, Schwing Electrical.
[PHOTO OMITTED]
Fred A. Heruth, First Vice President, Commercial Lending, SBLI.
Account Officer: Fred A. Heruth,
First Vice President, Commercial Lending.
Customer: Schwing Electrical Supply Corporation.
"My philosophy on customer service is quite simple: in quick order, get to
know your customer's needs, marketplace and expectations of you; be available 24
hours a day, 7 days a week; know your Bank's products; accurately interpret your
customer's requests and then take the time to explain the details of what you
are recommending to your customer's complete understanding. That extra step of
being precise is the cornerstone of effective service delivery. Here at State
Bank, all lending decisions are local--our ability to approve a loan request,
once completed, can virtually just take minutes," says Fred Heruth, SBLI.
Schwing Electrical Supply Corporation, Farmingdale, New York, is Long Island's
only independent electrical distributor with multiple locations. They are a
wholesale distributor of electrical construction equipment and they generate
extensive sales from their export division. State Bank provides Schwing with
lines of credit, equipment and vehicle financing, deposit services and is
working with Schwing's management team on expansion programs.
- --------------------------------------------------------------------------------
"Schwing, having just celebrated its 40th anniversary in business, has had
relationships with a number of banking institutions on Long Island and all have
come up short in one area or another. We feel that State Bank of Long Island
accommodates our aggressive approach to business and we have yet to find an
instance where our needs were not fully satisfied."
Charles W. Schwing, Founder,
Schwing Electrical Supply Corporation
- --------------------------------------------------------------------------------
<PAGE>
Board of Directors STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------12
[PHOTOS OMITTED]
(Standing from left to right)
Joseph F. Munson
Chairman, TRM International, Inc.
Richard W. Merzbacher
Vice Chairman, State Bancorp, Inc. and
President, State Bank of Long Island
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
State Bancorp, Inc. and
State Bank of Long Island
Arthur Dulik, Jr.
Chief Financial Officer, Altana, Inc.
J. Robert Blumenthal
President, Harwyn Enterprises, Inc.
Gerald P. Rosenberg
Secretary to the Board
Daniel T. Rowe
President, State Bancorp, Inc. and
Vice Chairman, State Bank of Long Island
(Seated from left to right)
Carl R. Bruno
Chief Financial Officer,
DiFazio Electric, Inc.
Gary Holman
Vice Chairman of the Board of Directors,
State Bancorp, Inc. and
State Bank of Long Island;
Partner, Lamb & Barnosky, LLP
Suzanne H. Rueck
Manager, New Hyde Park Inn
John F. Picciano
Attorney
<PAGE>
Financial Table of Contents
- ------------------------------------------------------------------------------13
Consolidated Financial Statements ..................... 14
Notes to Consolidated Financial Statements ............ 18
Independent Auditors' Report .......................... 28
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 29
Statistical Information ............................... 42
Market Data ........................................... 48
<PAGE>
Consolidated Balance Sheets STATE BANCORP, INC. AND SUBSIDIARY
December 31, 1999 and 1998
- ------------------------------------------------------------------------------14
<TABLE>
<CAPTION>
-------------
Notes 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks ............................................................ 10 $ 37,428,471 $ 19,274,435
Securities purchased under agreements to resell .................................... 1 27,000,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .......................................................... 64,428,471 19,274,435
Securities held to maturity (estimated fair value of
$565,528 in 1999 and $2,526,401 in 1998) ......................................... 1,2 569,002 2,516,035
Securities available for sale--at estimated fair value ............................. 1,2 376,861,995 279,338,611
Loans (net of allowance for possible loan losses of
$7,106,627 in 1999 and $5,788,440 in 1998) ....................................... 1,3,12 481,841,758 414,847,940
Bank premises and equipment--net ................................................... 1,4 3,639,681 3,878,013
Other assets ....................................................................... 1,5,7 22,488,503 12,838,476
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ......................................................................... $ 949,829,410 $ 732,693,510
=================================================================================================================================
LIABILITIES:
Deposits: 1
Demand ........................................................................... $ 132,961,189 $ 125,327,460
Savings .......................................................................... 198,396,801 195,614,058
Time ............................................................................. 473,104,936 276,079,430
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits ..................................................................... 804,462,926 597,020,948
Federal funds purchased ............................................................ 6 16,450,000 --
Securities sold under agreements to repurchase ..................................... 6 26,888,000 34,529,000
Other short-term borrowings ........................................................ 6 40,000,000 35,000,000
Accrued expenses, taxes and other liabilities ...................................... 7 5,925,387 5,285,670
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities .................................................................. 893,726,313 671,835,618
=================================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES ............................................... 9,10,12
STOCKHOLDERS' EQUITY: 8,14
Preferred stock, $0.01 par value, authorized 250,000 shares ........................ -- --
Common stock, $5.00 par value, authorized 20,000,000 shares; issued 7,078,221 shares
in 1999 and 6,988,940 shares in 1998; outstanding--6,962,606 shares in 1999 and
6,902,866 shares in 1998 ......................................................... 35,391,105 32,966,700
Surplus ............................................................................ 29,492,832 24,236,479
Retained earnings .................................................................. 5,119,181 4,866,852
Treasury stock (62,200 shares in 1999 and 12,000 shares in 1998) ................... 1 (918,649) (188,375)
Accumulated other comprehensive loss ............................................... (12,501,470) (364,710)
Unearned compensation .............................................................. 9 (479,902) (659,054)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ........................................................... 56,103,097 60,857,892
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................... $ 949,829,410 $ 732,693,510
=================================================================================================================================
-------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Income STATE BANCORP, INC. AND SUBSIDIARY
For the Years Ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------15
<TABLE>
<CAPTION>
------------
Notes 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME: 1
Loans ................................................................ 3 $ 40,339,780 $ 36,638,602 $ 34,345,284
Federal funds sold and securities purchased under agreements to resell 1,258,276 3,370,650 1,989,006
Securities held to maturity and securities available for sale:
States and political subdivisions .................................. 1,766,334 1,967,036 2,108,431
Mortgage-backed securities ......................................... 1,692,414 2,560,897 4,781,902
Government Agency securities ....................................... 16,256,014 10,040,535 7,305,284
Other .............................................................. 195,701 191,444 134,275
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income .................................................. 61,508,519 54,769,164 50,664,182
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Time certificates of deposit of $100,000 or more ..................... 13,897,682 12,283,595 10,150,061
Other deposits and temporary borrowings .............................. 11,575,414 11,880,491 12,540,136
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense ............................................... 25,473,096 24,164,086 22,690,197
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income .................................................. 36,035,423 30,605,078 27,973,985
PROVISION FOR POSSIBLE LOAN LOSSES ..................................... 1,3 3,000,000 1,800,000 1,950,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses ......... 33,035,423 28,805,078 26,023,985
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts .................................. 1,518,212 1,148,359 1,236,964
Net security losses .................................................. (375,689) (63,771) (53,180)
Other operating income ............................................... 1,003,519 448,523 450,515
- ---------------------------------------------------------------------------------------------------------------------------------
Total other income ..................................................... 2,146,042 1,533,111 1,634,299
- ---------------------------------------------------------------------------------------------------------------------------------
Income before operating expenses ....................................... 35,181,465 30,338,189 27,658,284
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and other employee benefits ................................. 9 13,028,108 10,982,354 9,827,811
Occupancy ............................................................ 10 1,772,853 1,732,772 1,557,255
Equipment ............................................................ 801,745 728,757 613,620
Marketing and advertising ............................................ 595,010 543,000 361,000
Deposit assessment fees .............................................. 146,226 137,936 123,015
Amortization of intangibles .......................................... 36,137 83,554 605,147
Other operating expenses ............................................. 4,072,014 3,759,110 3,634,588
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses ............................................. 20,452,093 17,967,483 16,722,436
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ............................................. 14,729,372 12,370,706 10,935,848
PROVISION FOR INCOME TAXES ............................................. 1,7 4,400,664 4,168,161 3,830,358
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME ............................................................. $ 10,328,708 $ 8,202,545 $ 7,105,490
=================================================================================================================================
BASIC EARNINGS PER COMMON SHARE ........................................ 1 $ 1.48 $ 1.19 $ 1.05
=================================================================================================================================
DILUTED EARNINGS PER COMMON SHARE ...................................... 1 $ 1.46 $ 1.17 $ 1.03
=================================================================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING ............................ 6,962,772 6,866,256 6,755,113
=================================================================================================================================
------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows STATE BANCORP, INC. AND SUBSIDIARY
For the Years Ended December 31, 1999, 1998, 1997
- ------------------------------------------------------------------------------16
<TABLE>
<CAPTION>
-------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .......................................................... $ 10,328,708 $ 8,202,545 $ 7,105,490
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses .............................. 3,000,000 1,800,000 1,950,000
Depreciation and amortization of bank premises and equipment .... 817,083 689,991 553,591
Amortization of intangibles ..................................... 36,137 83,554 605,147
Deferred income tax benefit ..................................... (496,797) (417,000) (365,200)
(Accretion) amortization of net (discount) premium on securities (500,607) 794,427 1,520,924
Net security losses ............................................. 375,689 63,771 53,180
Net gains on sale of other real estate owned ("OREO") ........... (670) (17,060) (56,680)
Amortization of unearned compensation ........................... 255,834 264,155 316,125
(Increase) decrease in other assets, net ........................ (3,223,128) 1,017,041 (2,458,249)
Increase in accrued expenses, taxes and other liabilities ....... 513,729 1,122,956 1,263,659
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................. 11,105,978 13,604,380 10,487,987
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities held to maturity ............. 2,941,533 14,803,516 32,606,246
Purchases of securities held to maturity ............................ (994,500) (6,684,533) (12,817,751)
Proceeds from sales of securities available for sale ................ 272,657,870 395,716,130 203,914,634
Proceeds from maturities of securities available for sale ........... 84,820,645 257,840,968 144,113,718
Purchases of securities available for sale .......................... (473,684,314) (656,400,168) (468,983,407)
Increase in loans, net .............................................. (69,993,818) (44,978,324) (26,355,020)
Proceeds from sale of OREO .......................................... 705,004 342,060 1,083,343
Purchases of bank premises and equipment, net ....................... (578,751) (1,066,973) (1,058,498)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................. (184,126,331) (40,427,324) (127,496,735)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in demand and savings deposits .................. 10,416,472 33,343,561 (9,747,425)
Increase (decrease) in time deposits ................................ 197,025,506 (47,550,533) 146,524,856
Increase (decrease) in Federal funds purchased ...................... 16,450,000 (6,000,000) 2,400,000
(Decrease) increase in securities sold under agreements to repurchase (7,641,000) 19,711,000 (59,261,000)
Increase (decrease) in other short-term borrowings .................. 5,000,000 (12,000,000) 35,000,000
Cash dividends paid ................................................. (3,326,924) (3,294,506) (2,538,326)
Proceeds from shares issued under the dividend reinvestment plan .... 761,179 867,842 809,862
Proceeds from stock options exercised ............................... 219,430 275,570 77,008
Purchase of treasury stock .......................................... (730,274) (188,375) --
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ................... 218,174,389 (14,835,441) 113,264,975
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 45,154,036 (41,658,385) (3,743,773)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................ 19,274,435 60,932,820 64,676,593
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 64,428,471 $ 19,274,435 $ 60,932,820
=========================================================================================================================
SUPPLEMENTAL DATA:
Interest paid ....................................................... $ 24,524,372 $ 24,363,965 $ 22,027,177
=========================================================================================================================
Income taxes paid ................................................... $ 5,291,000 $ 4,358,592 $ 4,328,779
=========================================================================================================================
Transfer from loans to OREO ......................................... $ -- $ 840,000 $ 189,334
=========================================================================================================================
Adjustment to unrealized net loss on securities available for sale .. $ (18,807,332) $ (225,954) $ 1,221,056
=========================================================================================================================
Dividends declared but not paid as of year end ...................... $ 906,473 $ 780,485 $ 730,526
=========================================================================================================================
-------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Consolidated Statements of Stockholders' STATE BANCORP, INC. AND SUBSIDIARY
Equity and Comprehensive Income (Loss)
For the Years Ended December 31, 1999, 1998, 1997
- ------------------------------------------------------------------------------17
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
Common Retained Treasury hensive
Notes Stock Surplus Earnings Stock Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ......................... $25,505,240 $22,915,331 $2,130,980 $ -- $ (936,100)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 7,105,490
Other comprehensive income, net of tax:
Unrealized holding gains
arising during the period ..................
Reclassification adjustment for losses
included in net income .....................
Total other comprehensive income ............... 721,033
Total comprehensive income .......................
Cash dividend ($.40 per share) ................... 1 (2,668,726)
6 for 5 stock split (1,026,672 shares
at $5.00 par value) ............................ 1 5,133,360 (5,133,360)
Shares issued under the dividend reinvestment
plan (54,581 shares at 95% of market value) .... 272,905 536,957
Stock options exercised .......................... 8 59,125 17,883
Amortization of unearned compensation ............ 9 120,577
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ....................... 30,970,630 18,457,388 6,567,744 (215,067)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 8,202,545
Other comprehensive income, net of tax:
Unrealized holding losses
arising during the period ..................
Reclassification adjustment for gains
included in net income .....................
Total other comprehensive loss ................. (149,643)
Total comprehensive income .......................
Cash dividend ($.49 per share) ................... 1 (3,344,465)
5% stock dividend (312,332 shares
at market value) ............................... 1 1,561,660 4,997,312 (6,558,972)
Shares issued under the dividend reinvestment
plan (42,725 shares at 95% of market value) .... 213,625 654,217
Stock options exercised .......................... 8 220,785 54,785
Treasury stock purchased ......................... 1 (188,375)
Amortization of unearned compensation ............ 9 72,777
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................... 32,966,700 24,236,479 4,866,852 (188,375) (364,710)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 10,328,708
Other comprehensive income, net of tax:
Unrealized holding losses
arising during the period ..................
Reclassification adjustment for losses
included in net income .....................
Total other comprehensive loss ................. (12,136,760)
Total comprehensive loss .........................
Cash dividend ($.50 per share) ................... 1 (3,452,912)
6% stock dividend (398,404 shares
at market value) ............................... 1 1,992,020 4,631,447 (6,623,467)
Shares issued under the dividend reinvestment
plan (50,931 shares at 95% of market value) .... 254,655 506,524
Stock options exercised .......................... 8 177,730 41,700
Treasury stock purchased ......................... 1 (730,274)
Amortization of unearned compensation ............ 9 76,682
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ....................... $35,391,105 $29,492,832 $5,119,181 $(918,649) $(12,501,470)
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unearned Compre-
Compen- hensive
Notes sation Total Income
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ......................... $(1,045,980) $48,569,471
- ------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 7,105,490 $ 7,105,490
-----------
Other comprehensive income, net of tax:
Unrealized holding gains
arising during the period .................. 713,816
Reclassification adjustment for losses
included in net income ..................... 7,217
-----------
Total other comprehensive income ............... 721,033 721,033
-----------
Total comprehensive income ....................... $ 7,826,523
===========
Cash dividend ($.40 per share) ................... 1 (2,668,726)
6 for 5 stock split (1,026,672 shares
at $5.00 par value) ............................ 1 --
Shares issued under the dividend reinvestment
plan (54,581 shares at 95% of market value) .... 809,862
Stock options exercised .......................... 8 77,008
Amortization of unearned compensation ............ 9 195,548 316,125
- ------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 ....................... (850,432) 54,930,263
- ------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 8,202,545 $ 8,202,545
-----------
Other comprehensive income, net of tax:
Unrealized holding losses
arising during the period .................. (127,239)
Reclassification adjustment for gains
included in net income ..................... (22,404)
-----------
Total other comprehensive loss ................. (149,643) (149,643)
-----------
Total comprehensive income ....................... $ 8,052,902
===========
Cash dividend ($.49 per share) ................... 1 (3,344,465)
5% stock dividend (312,332 shares
at market value) ............................... 1 --
Shares issued under the dividend reinvestment
plan (42,725 shares at 95% of market value) .... 867,842
Stock options exercised .......................... 8 275,570
Treasury stock purchased ......................... 1 (188,375)
Amortization of unearned compensation ............ 9 191,378 264,155
- ------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 ....................... (659,054) 60,857,892
- ------------------------------------------------------------------------------------
Comprehensive income:
Net income ..................................... 10,328,708 $10,328,708
-----------
Other comprehensive income, net of tax:
Unrealized holding losses
arising during the period .................. (12,155,511)
Reclassification adjustment for losses
included in net income ..................... 18,751
-----------
Total other comprehensive loss ................. (12,136,760) (12,136,760)
-----------
Total comprehensive loss ......................... $(1,808,052)
===========
Cash dividend ($.50 per share) ................... 1 (3,452,912)
6% stock dividend (398,404 shares
at market value) ............................... 1 --
Shares issued under the dividend reinvestment
plan (50,931 shares at 95% of market value) .... 761,179
Stock options exercised .......................... 8 219,430
Treasury stock purchased ......................... 1 (730,274)
Amortization of unearned compensation ............ 9 179,152 255,834
- ------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 ....................... $(479,902) $56,103,097
====================================================================================
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------18
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Organization and Nature of Operations--The consolidated financial statements
include the accounts of State Bancorp, Inc. and its wholly-owned subsidiary,
State Bank of Long Island (the "Bank"). The Bank's consolidated financial
statements include the accounts of its wholly-owned subsidiaries, SB Portfolio
Management Corp. ("SB Portfolio"), SB Financial Services Corp. ("SB Financial"),
SB ORE Corp. and New Hyde Park Leasing Corporation. SB Portfolio and SB
Financial are Delaware-based subsidiaries formed in June 1998. SB Portfolio
manages a portfolio of fixed income investments, and SB Financial provides
balance sheet management services with a focus on interest rate risk management.
State Bancorp, Inc. and subsidiary are collectively referred to hereafter as the
"Company." All intercompany accounts and transactions have been eliminated.
The Company was incorporated as a bank holding company under the laws of
the state of New York in 1985 to provide consumer, commercial and municipal
banking services to clients located primarily in the Queens, Nassau and Suffolk
County areas. It offers a full range of deposit and loan products through nine
full service branches. In addition, the Company offers merchant credit card
services, access to mutual fund and annuity products and offers a consumer debit
card with membership in a national ATM network. The Company currently has ATMs
at five of its nine branch locations.
Basis of Presentation--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and with general practice within the
banking industry. The following is a summary of the more significant accounting
and reporting policies:
Securities Held to Maturity and Securities Available For Sale--At the time of
purchase of a security, the Bank designates the security as either available for
sale or held to maturity, depending upon investment objectives, liquidity needs
and intent. Securities held to maturity are stated at cost, adjusted for premium
amortized or discount accreted, if any. The Bank has the positive intent and
ability to hold such securities to maturity. Securities available for sale are
stated at estimated fair value. Unrealized gains and losses are excluded from
income and reported net of tax as a separate component of stockholders' equity
until realized. Trading securities are purchased and held principally for the
purpose of selling them in the near term. Trading generally reflects active and
frequent buying and selling, and trading securities are generally used with the
objective of generating profits on short-term differences in price. As of
December 31, 1999 and 1998, the Bank did not hold any trading securities.
Interest earned on investment securities is included in interest income.
Realized gains and losses on the sale of securities are reported in the
statements of consolidated income and determined using the adjusted cost of the
specific security sold.
Income Recognition--The Bank discontinues the accrual of interest on loans
whenever there is reasonable doubt that interest and/or principal will be
collected, or when either principal or interest is 90 days or more past due and
the loan is not well collateralized nor in the process of collection. Income is
not accrued for installment loans which are 90 days past due unless the Bank
holds cash collateral therefor. Interest received on nonaccrual loans is either
applied against principal or reported as income, according to management's
judgement as to the collectibility of the principal.
Allowance for Possible Loan Losses--The allowance for possible loan losses is
established through a provision for loan losses charged to expenses. Loans are
charged against the allowance when management believes that the collectibility
of the principal is unlikely, while recoveries of previously charged-off loans
are credited to the allowance. The balance in the allowance for possible loan
losses is maintained at a level that, in the opinion of management, is
sufficient to absorb possible losses. To determine that level, management
identifies problem loans based on the financial condition of the borrower, the
value of any collateral and/or guarantor support. Based upon the resultant risk
categories assigned to each loan and the procedures regarding impairment
described below, an appropriate reserve level is determined. Management also
evaluates the quality of, and changes in, the portfolio, while also taking into
consideration the Bank's historical loss experience, the existing economic
climate of the service area in which the Bank operates, examinations by
regulatory authorities, internal reviews and other evaluations in determining
the appropriate allowance balance. While management utilizes all available
information to estimate the adequacy of the allowance for possible loan losses,
the ultimate collectibility of a substantial portion of the loan portfolio and
the need for future additions to the allowance will be based upon changes in
economic conditions and other relevant factors.
The Company accounts for impaired loans in accordance with Statements of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures." Commercial and commercial real
estate loans are considered impaired when, based on current information and
events, it is probable that the Company will not be able to collect all of the
principal and interest due under the contractual terms of the loan. Management
considers all nonaccrual loans for impairment. Large groups of smaller-balance
homogeneous loans, such as consumer and residential mortgages, are collectively
evaluated for impairment.
The allowance for possible loan losses related to loans that are impaired
includes reserves which are based upon the expected future cash flows,
discounted at the loan's effective interest rate, or the fair value of the
underlying collateral for collateral-dependent loans, or the observable market
price. This evaluation is inherently subjective as it requires material
estimates, including the amount and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change.
Bank Premises and Equipment--Net--Bank premises and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation expense is
computed on the straight-line method over
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------19
the estimated useful lives of the related assets which range from 3 to 40 years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining terms of the leases.
Loan Origination Fees and Costs--Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment of the yield
on the related loan.
Income Taxes--The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
Company's consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial accounting and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. As changes in tax laws are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Treasury Stock--Stock held in treasury by the Company is accounted for using the
cost method, which treats stock held in treasury as a reduction to total
stockholders' equity.
Cash Dividends--Cash dividends per common share have been restated to give
retroactive effect to stock dividends and splits.
Stock Dividends--Stock dividends issued are recorded by transferring the
aggregate market value of the shares issued from retained earnings to common
stock and surplus. All per share information included in the consolidated
financial statements and the notes thereto has been restated to give retroactive
effect to stock dividends.
Earnings Per Common Share--The Company adopted SFAS No. 128, "Earnings Per
Share" effective December 31, 1997. Basic earnings per common share is computed
based on the weighted average number of shares outstanding. Diluted earnings per
share is computed based on the weighted average number of shares outstanding,
increased by the number of common shares that are assumed to have been purchased
with the proceeds from the exercise of stock options (treasury stock method).
These purchases were assumed to have been made at the average market price of
the common stock. The average market price is based on the average closing bid
price for the common stock. Retroactive recognition has been given for stock
dividends and splits, as well as for the adoption of SFAS No. 128.
-----------
For the Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net Income ........................... $10,328,708 $ 8,202,545 $ 7,105,490
Average dilutive stock options
outstanding ........................ 200,039 226,134 275,364
Average exercise price per share ..... $ 5.00 $ 6.43 $ 8.18
Average market price--diluted basis .. $ 16.00 $ 20.11 $ 17.83
Average common shares outstanding .... 6,962,772 6,866,256 6,755,113
Increase in shares due to exercise
of options--diluted basis .......... 99,181 134,349 149,089
- --------------------------------------------------------------------------------
Adjusted shares outstanding--diluted . 7,061,953 7,000,605 6,904,202
- --------------------------------------------------------------------------------
Net income per share--basic .......... $ 1.48 $ 1.19 $ 1.05
================================================================================
Net income per share--diluted ........ $ 1.46 $ 1.17 $ 1.03
================================================================================
-----------
Statements of Cash Flows--For the purpose of presenting the statements of cash
flows, the Company considers Federal funds sold and securities purchased under
agreements to resell to be cash equivalents because such assets are convertible
into fixed amounts of cash within several days of initial purchase.
Loans Foreclosed--Property acquired through foreclosure (other real estate owned
or "OREO") is stated at the lower of cost or fair value less estimated selling
costs. Losses arising at the time of foreclosure are charged against the
allowance for possible loan losses. Revenues and expenses from operations or
changes in the carrying value of these assets are included in operating
expenses.
Intangibles--Intangibles consist of core deposit intangibles and the excess
market value of leases acquired. Intangibles are carried at cost less
accumulated amortization. Amortization is provided over the period of
anticipated benefit (3 to 19 years).
Accounting for Stock Options--The Company accounts for stock-based compensation
using the intrinsic value method which recognizes as expense the difference
between the market value of the stock and the exercise price at grant date. The
Company discloses the pro forma effects of accounting for stock-based
compensation using the fair value method.
Recent Accounting Developments--During 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 requires an entity to
present, as a component of comprehensive income, the amounts from transactions
and other events which currently are excluded from the statement of income and
are recorded directly to stockholders' equity. SFAS No. 131 requires an entity
to disclose financial information in a manner consistent to internally used
information and requires more detailed disclosures of operating and reporting
segments than are currently in practice. The adoption of SFAS No. 130 and No.
131, which concerns disclosure standards only, did not have a material impact on
the Company's financial position and results of operations.
Accounting Principles Issued and Not Adopted--In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. This
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This statement, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, and should not be applied retroactively to
financial statements of prior periods. Management of the Bank does not believe
this statement will have a material impact on the Bank's results of operations
or financial position when adopted.
Reclassifications--Certain reclassifications have been made to prior years'
amounts to conform them to the current year's presentation.
<PAGE>
Notes to Consolidated Financial Statements
(continued)
- ------------------------------------------------------------------------------20
2. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and estimated fair
value of securities held to maturity and securities available for sale at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1999 Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
Obligations of states and
political subdivisions ... $ 569,002 $4,200 $ (7,674) $ 565,528
- -----------------------------------------------------------------------------------------------------------
Total Securities Held
to Maturity ................ 569,002 4,200 (7,674) 565,528
- -----------------------------------------------------------------------------------------------------------
Securities Available for Sale:
Obligations of states and
political subdivisions ... 89,096,446 -- (376,891) 88,719,555
Government Agency
securities ............... 279,702,951 -- (18,266,198) 261,436,753
Corporate securities ....... 4,285,950 -- -- 4,285,950
Mortgage-backed secu-
rities and collateralized
mortgage obligations ..... 23,174,145 -- (754,408) 22,419,737
- -----------------------------------------------------------------------------------------------------------
Total Securities
Available for Sale ......... 396,259,492 -- (19,397,497) 376,861,995
===========================================================================================================
Total Securities ............. $396,828,494 $4,200 $(19,405,171) $377,427,523
===========================================================================================================
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1998 Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
Obligations of states
and political subdivisions $ 2,516,035 $ 10,458 $ (92) $ 2,526,401
- -------------------------------------------------------------------------------------------------------------
Total Securities Held
to Maturity ................ 2,516,035 10,458 (92) 2,526,401
- -------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
Obligations of states
and political subdivisions 21,644,855 7,483 (12,103) 21,640,235
Government Agency
securities ............... 213,274,365 193,205 (444,399) 213,023,171
Corporate securities ....... 2,368,150 -- -- 2,368,150
Mortgage-backed securities
and collateralized
mortgage obligations ..... 42,641,405 -- (334,350) 42,307,055
- -------------------------------------------------------------------------------------------------------------
Total Securities
Available for Sale ......... 279,928,775 200,688 (790,852) 279,338,611
=============================================================================================================
Total Securities ............. $282,444,810 $ 211,146 $ (790,944) $281,865,012
=============================================================================================================
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
and securities available for sale at December 31, 1999, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
- --------------------------------------------------------------------------------
Securities Held to Maturity:
Due in one year or less .................... $ 242,000 $ 241,395
Due after one year through five years ...... 327,002 324,133
- --------------------------------------------------------------------------------
Total Securities Held to Maturity ............ $ 569,002 $ 565,528
Securities Available for Sale:
Due in one year or less .................... $ 87,296,051 $ 86,990,597
Due after one year through five years ...... 25,000,000 24,167,000
Due after five years through ten years ..... 123,231,510 116,949,370
Due after ten years ....................... 137,557,786 126,335,291
- --------------------------------------------------------------------------------
Subtotal ..................................... 373,085,347 354,442,258
Mortgage-backed securities and
collateralized mortgage obligations ........ 23,174,145 22,419,737
- --------------------------------------------------------------------------------
Total Securities Available for Sale .......... $396,259,492 $376,861,995
================================================================================
In 1999, 1998 and 1997, gross gains of $68,091, $231,194 and $192,958 and
gross losses of $443,780, $294,965 and $246,138, respectively, were realized on
the sale of securities available for sale.
At December 31, 1999, the Bank owned securities available for sale in
excess of ten percent of stockholder's equity for the following issuers:
Amortized Estimated
Cost Fair Value
- --------------------------------------------------------------------------------
Town of Oyster Bay ..................... $16,131,448 $16,064,000
Village of Hempstead ................... $ 6,991,600 $ 6,978,316
- --------------------------------------------------------------------------------
Securities held to maturity and securities available for sale with an
amortized cost of $396,828,494 and $279,701,658 and an estimated fair value of
$377,427,523 and $279,121,413 at December 31, 1999 and 1998, respectively, were
pledged for public deposits, securities sold under agreements to repurchase,
other short-term borrowings and fiduciary purposes.
3. LOANS--NET
At December 31, 1999 and 1998, net loans consisted of the following:
------------
1999 1998
- --------------------------------------------------------------------------------
Commercial and industrial .................... $220,874,178 $197,601,552
Real estate--mortgage ........................ 216,954,748 187,740,359
Real estate--construction .................... 25,752,261 17,164,726
Loans to individuals ......................... 5,738,600 7,748,895
Tax exempt and other ......................... 19,709,073 10,461,323
- --------------------------------------------------------------------------------
Gross loans .................................. 489,028,860 420,716,855
Less:
Unearned income ............................ 80,475 80,475
Allowance for possible loan losses ......... 7,106,627 5,788,440
- --------------------------------------------------------------------------------
Loans--net ................................... $481,841,758 $414,847,940
================================================================================
------------
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------21
The Bank's real estate loans and loan commitments are primarily for
properties located throughout Long Island, New York. It is the Bank's policy to
spread risk among a broad range of industries and to monitor concentration and
associated levels of risk on an ongoing basis. As of December 31, 1999 and 1998,
the only concentration of loans exceeding 10% of total loans was the Bank's
loans totaling $77,541,000 and $71,590,000, respectively, from real estate
operators, lessors and developers. Repayment of these loans is dependent in part
upon the overall economic health of the Company's market area and current real
estate values. Credit losses arising from lending transactions in this industry
compare favorably with the Bank's credit loss experience on its portfolio as a
whole. The Bank considers the credit circumstances, the nature of the project,
and loan to value ratios for all real estate loans. The Bank's loan to value
policies are generally more conservative than regulatory guidelines.
The Bank makes loans to its directors and executive officers, and other
related parties, in the ordinary course of its business. These loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and,
in the opinion of management, do not bear more than normal credit risk. Loans
made to directors and executive officers, either directly or indirectly, totaled
$1,727,093 and $1,537,146 at December 31, 1999 and 1998, respectively. New loans
totaling $2,860,050 and $2,727,675 were extended and payments of $2,670,103 and
$2,619,147 were received during 1999 and 1998, respectively, on these loans.
Activity in the allowance for possible loan losses for the three years
ended December 31, 1999 is as follows:
------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance, January 1 ................ $ 5,788,440 $ 5,123,651 $ 5,008,965
Provision charged to income ....... 3,000,000 1,800,000 1,950,000
Charge-offs, net of recoveries
of $443,881, $520,990
and $222,429 .................... (1,681,813) (1,135,211) (1,835,314)
- --------------------------------------------------------------------------------
Balance, December 31 .............. $ 7,106,627 $ 5,788,440 $ 5,123,651
================================================================================
------------
As of December 31, 1999 and 1998, the recorded investment in loans that
are considered to be impaired is summarized below.
----------
1999 1998
- --------------------------------------------------------------------------------
Amount measured using the present value of expected
future cash flows, discounted at each loan's
effective interest rate ............................ $ -- $5,529,049
Impaired collateral-dependent loans .................. 3,981,474 3,133,067
- --------------------------------------------------------------------------------
Total amount evaluated as impaired ................... $3,981,474 $8,662,116
================================================================================
Average impaired loan balance ........................ $6,581,068 $8,437,893
================================================================================
Interest income recognized on impaired loans ......... $ 36,099 $ 315,543
================================================================================
----------
As a result of the Bank's measurement of impaired loans, an allowance for
possible loan losses of approximately $608,000 and $1,420,000 was established
for $3,981,474 and $8,352,709 of the total impaired loans at December 31, 1999
and 1998, respectively. No specific allowance was required for the remaining
balance of impaired loans in 1998.
At December 31, 1999 and 1998, loans with unpaid principal balances on
which the Bank is no longer accruing interest income were $5,193,855 and
$3,676,431, respectively. Interest income would have been approximately
$423,000, $262,000 and $367,000 greater in 1999, 1998 and 1997 respectively, had
these loans been current. Interest income on total nonaccrual loans, which is
recorded only when received, amounted to approximately $48,000, $64,000 and
$70,000 for 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, loans restructured, and still accruing
interest in accordance with the modified terms, were $421,511 and $5,544,775,
respectively. Interest income would have been approximately $20,000, $248,000
and $349,000 greater in 1999, 1998 and 1997 respectively, had the restructured
loans performed according to their original terms.
At December 31, 1999, commercial real estate mortgages of $77,720,101 were
pledged at the Special Liquidity Facility of the Federal Reserve Bank of New
York.
4. BANK PREMISES AND EQUIPMENT--NET
At December 31, 1999 and 1998, Bank premises and equipment consisted of
the following:
------------------------------------------
Accumulated
Depreciation/ Net Book
Cost Amortization Value
- --------------------------------------------------------------------------------
December 31, 1999:
Building ..................... $1,885,161 $ 787,900 $1,097,261
Leasehold improvements ....... 1,374,673 575,767 798,906
Furniture and fixtures ....... 3,521,936 2,519,595 1,002,341
Computer equipment
and software ............... 1,970,345 1,229,172 741,173
- --------------------------------------------------------------------------------
Total .......................... $8,752,115 $5,112,434 $3,639,681
================================================================================
------------------------------------------
December 31, 1998:
Building ..................... $1,727,116 $ 727,607 $ 999,509
Leasehold improvements ....... 1,348,110 466,993 881,117
Furniture and fixtures ....... 3,400,524 2,308,849 1,091,675
Computer equipment
and software ............... 1,868,853 963,141 905,712
- --------------------------------------------------------------------------------
Total .......................... $8,344,603 $4,466,590 $3,878,013
================================================================================
5. OTHER ASSETS
At December 31, 1999 and 1998, other assets consisted of the following:
-----------
1999 1998
- --------------------------------------------------------------------------------
Interest receivable--investments ................... $ 6,026,305 $ 3,837,573
Interest receivable--loans ......................... 2,716,599 2,002,240
Net deferred income taxes .......................... 10,633,449 3,466,081
Prepaid expenses ................................... 648,060 774,634
Excess market value of leases acquired
(net of accumulated amortization
of $258,970 and $222,833) ........................ 363,496 399,633
Cash surrender value of life insurance policies .... 1,504,269 1,232,822
Principal receivable--mortgage-backed securities ... 17,837 28,882
Other real estate owned ............................ -- 704,334
Other .............................................. 578,488 392,277
- --------------------------------------------------------------------------------
Total .............................................. $22,488,503 $12,838,476
================================================================================
-----------
<PAGE>
Notes to Consolidated Financial Statements
(continued)
- ------------------------------------------------------------------------------22
6. LINES OF CREDIT AND BORROWED FUNDS
At December 31, 1999 and 1998, correspondent banks extended unsecured
lines of credit aggregating $16,500,000 to the Bank for the purchase of Federal
funds and for foreign exchange transactions. Federal funds purchased and
securities sold under agreements to repurchase generally mature within one to
seven days from the transaction date.
In addition to the above, the Bank may use a line of credit with the
Federal Home Loan Bank of New York ("FHLB") for overnight funding or on a term
basis to match fund asset purchases. Based upon a multiple of the FHLB stock
that the Bank currently owns, approximately $40,000,000 of this line may be
drawn on a term or overnight basis. The FHLB line is renewed on an annual basis.
In October 1997, the Bank entered into a five-year, callable term borrowing with
FHLB under this line. At December 31, 1999 and 1998, the interest rate was
5.49%. In February 1998, the Bank entered into a ten-year, callable term
borrowing with a brokerage firm which was called in November of 1999 and was not
renewed. At December 31, 1998 and until the call date, the interest rate was
4.85%.
Also, at December 31, 1999, commercial real estate mortgages of
$77,720,101 were pledged at the Special Liquidity Facility of the Federal
Reserve Bank of New York, enabling the Bank to draw upon a line of up to
$49,506,083. Any borrowings under this Special Liquidity Facility would carry an
interest rate of 150 basis points in excess of the Federal funds borrowing rate.
The Bank has yet to draw upon its line established during the fourth quarter of
1999.
The following summarizes the amounts at December 31, 1999 and 1998, and
the average amounts for 1999 and 1998 of borrowed funds outstanding:
Outstanding at December 31, Average Amount Outstanding
----------- -----------
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Federal funds
purchased ........... $16,450,000 $ -- $ 1,474,000 $ 996,000
Securities sold under
agreements to
repurchase .......... $26,888,000 $34,529,000 $28,161,000 $ 3,411,000
FHLB--overnight ....... $15,000,000 $ -- $ 2,304,000 $ 2,393,000
FHLB--term ............ $25,000,000 $25,000,000 $25,000,000 $25,000,000
Brokerage firm ........ $ -- $10,000,000 $ 8,822,000 $ 8,712,000
- --------------------------------------------------------------------------------
----------- -----------
7. INCOME TAXES
The components of income tax expense for the years ended December 31, 1999,
1998 and 1997 are as follows:
-----------
1999 1998 1997
- --------------------------------------------------------------------------------
Federal:
Current ............. $ 4,729,515 $ 3,654,631 $ 3,059,510
Deferred ............ (446,007) (372,000) (320,722)
- --------------------------------------------------------------------------------
Subtotal .............. 4,283,508 3,282,631 2,738,788
- --------------------------------------------------------------------------------
State:
Current ............. 167,946 930,530 1,136,048
Deferred ............ (50,790) (45,000) (44,478)
- --------------------------------------------------------------------------------
Subtotal .............. 117,156 885,530 1,091,570
- --------------------------------------------------------------------------------
Total $ 4,400,664 $ 4,168,161 $ 3,830,358
================================================================================
-----------
Total income tax expense was different from the amounts computed by
applying the statutory Federal income tax rate to income before income taxes due
to the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax
expense at
statutory rate ...... $ 5,155,280 35.0% $ 4,329,747 35.0% $ 3,827,546 35.0%
Surtax exemption .... (107,648) (0.7) (123,707) (1.0) (109,358) (1.0)
Increase (reduction)
in taxes resulting
from:
Tax exempt
interest on
investments,
net of interest
expense
disallowed
of $277,246,
$306,676 and
$330,121....... (626,163) (4.3) (568,481) (4.6) (575,904) (5.3)
State income tax,
net of Federal
tax benefit ... 77,008 0.5 584,450 4.7 720,436 6.6
Other ........... (97,813) (0.6) (53,848) (0.4) (32,362) (0.3)
- --------------------------------------------------------------------------------------------------
Income tax expense .. $ 4,400,664 29.9% $ 4,168,161 33.7% $ 3,830,358 35.0%
==================================================================================================
</TABLE>
At December 31, 1999 and 1998, the deferred tax assets and liability are
comprised of the following:
-----------
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for possible loan losses ........... $ 2,790,910 $ 2,222,180
Unrealized holding loss on securities
available for sale ......................... 6,896,027 225,455
Intangible assets ............................ 694,475 788,143
Bank premises and equipment .................. 136,498 132,293
Other ........................................ 115,539 98,010
- --------------------------------------------------------------------------------
Subtotal ....................................... 10,633,449 3,466,081
Deferred tax liability ......................... -- --
Net deferred tax assets ........................ $10,633,449 $ 3,466,081
================================================================================
-----------
The deferred tax assets and liability are netted and presented in a single
amount, which is included in other assets in the accompanying consolidated
balance sheets. The income tax (benefit) expense associated with net security
(losses) or gains amounted to ($157,510), ($33,534) and ($21,777) in 1999, 1998
and 1997, respectively.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------23
8. INCENTIVE STOCK OPTION PLANS
Under the terms of the Company's incentive stock option plans adopted in
January 1987 and April 1994, options have been granted to certain key personnel
which entitle each holder to purchase shares of the Company's common stock. The
option price is the higher of the fair market value or the book value of the
shares at the date of grant. Such options are exercisable commencing one year
from the date of grant, at the rate of 25 percent per year, and expire eight
years from the date of the grant.
At December 31, 1999, 116,050 options for the purchase of 181,672 shares
were exercisable, and 37,519 shares were reserved for possible issuance. A
summary of stock option activity follows after giving retroactive effect to all
stock splits and dividends:
<TABLE>
<CAPTION>
Option Price Weighted Average
Number Number (Approximate Fair Exercise Price
of Options of Shares Value at Date of Grant) Total Per Share
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--
January 1, 1997 ................... 137,895 254,818 $ 10.60-$ 14.25 $1,743,524 $ 6.84
Granted ........................... 36,600 48,883 $13.375 489,525 $10.01
Exercised ......................... (6,525) (13,653) $ 10.60-$ 14.25 (77,008) $ 5.64
Cancelled or forfeited ............ (1,200) (1,685) $12.625-$ 14.25 (16,163) $ 9.59
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1997 ................. 166,770 288,363 $ 10.60-$ 14.25 2,139,878 $ 7.42
Granted ........................... 55,150 61,385 $ 23.00 1,268,450 $20.66
Exercised ......................... (21,345) (48,660) $ 10.60-$ 14.25 (275,570) $ 5.66
Cancelled or forfeited ............ (900) (1,137) $13.375-$ 23.00 (16,988) $14.93
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1998 ................. 199,675 299,951 $ 10.60-$ 23.00 3,115,770 $10.39
Granted ........................... 61,000 64,660 $ 17.25 1,052,250 $16.27
Exercised ......................... (16,888) (37,529) $ 10.60-$ 14.25 (217,830) $ 5.80
Cancelled or forfeited ............ (3,825) (4,490) $13.375-$ 23.00 (70,891) $15.79
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding--
December 31, 1999 .................. 239,962 322,592 $ 10.60-$ 23.00 $3,879,299 $12.03
=================================================================================================================================
</TABLE>
The following summarizes shares subject to purchase from options
outstanding and exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.21-$5.52 ...................... 58,605 0.9 years $ 5.36 58,605 $ 5.36
$8.00-$10.01 ..................... 141,493 4.2 years $ 9.28 108,290 $ 9.06
$16.27-$20.66 .................... 122,494 6.6 years $18.39 14,777 $20.66
- ------------------------------------------------------------------------------------------------------------------------------------
322,592 4.5 years $12.03 181,672 $ 8.81
====================================================================================================================================
</TABLE>
The estimated fair value of options granted during 1999 and 1998 was $3.09
and $6.04 per share, respectively. The Company applies Accounting Principles
Board ("APB") Opinion No. 25 and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its incentive
stock option plans. Had compensation cost for the Company's two plans been
determined at the fair value on the grant dates for awards under those plans,
consistent with the method in SFAS No. 123, "Accounting for Stock-based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
-----------
1999 1998 1997
- --------------------------------------------------------------------------------
Net income
As reported ................. $10,328,708 $8,202,545 $7,105,490
Pro Forma ................... $10,146,658 $8,029,596 $7,020,040
- --------------------------------------------------------------------------------
Basic earnings per common share
As reported ................. $ 1.48 $ 1.19 $ 1.05
Pro Forma ................... $ 1.46 $ 1.17 $ 1.04
================================================================================
-----------
<PAGE>
The fair value of options granted under the Company's incentive stock
option plans during 1999, 1998 and 1997 were estimated on the date of grant
using the Binomial option-pricing model with the following weighted-average
assumptions used:
--------
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield ......................... 3.2% 2.7% 3.8%
Expected volatility .................... 19.6% 26.0% 13.3%
Risk-free interest rate ................ 4.31% 4.56% 6.63%
Expected life of options ............... 7 years 7 years 7.5 years
================================================================================
--------
9. EMPLOYEE BENEFIT PLANS
The Bank has an Employee Stock Ownership Plan (the "ESOP") which is a
defined contribution plan covering substantially all full-time employees. Bank
contributions to the ESOP represent a minimum of three percent of an employee's
annual gross compensation. Employees become 20 percent vested after two years of
employment, with an additional 20 percent vesting each year. Full vesting takes
place upon the completion of six years of employment. Employee contributions are
not permitted. At December 31, 1999, the ESOP had all of its assets invested in
the Company's common stock. The Bank funds all amounts when due.
<PAGE>
Notes to Consolidated Financial Statements
(continued)
- ------------------------------------------------------------------------------24
In conjunction with the Rights Offering in July 1996, the ESOP borrowed
$1,200,000 from the Company to purchase 133,560 (adjusted for stock dividends
and splits) of the Company's shares. As such, the Company recorded a deduction
from stockholders' equity to reflect the unearned compensation for the shares.
As the unearned shares are released from collateral and allocated among
participants, the Company recognizes compensation expense equal to the current
market price of the shares released and the shares become outstanding for
earnings per share computations. Contributions under the ESOP charged to
operations amounted to $703,165, $631,494 and $541,722 in 1999, 1998 and 1997,
respectively. Compensation expense of $309,012 and $398,242 is applicable to the
19,617 shares and the 21,299 shares allocated in 1999 and 1998, respectively. As
of December 31, 1999 and 1998, the value of the 53,737 and the 73,354
unallocated shares was $765,752 and $1,124,533, respectively.
The Bank has a 401(k) Retirement Plan and Trust (the "401(k) Plan"), which
covers substantially all full-time employees. Employees may elect to contribute
up to sixteen percent of their annual gross compensation to the 401(k) Plan, and
the Bank will match one half of the employee's contribution up to a maximum of
three percent of the employee's annual gross compensation. Employees are fully
vested in both their own and Bank contributions. Bank contributions under the
401(k) Plan amounted to $209,109, $180,825 and $168,902 in 1999, 1998 and 1997,
respectively. The Bank funds all amounts when due. At December 31, 1999,
contributions to the 401(k) Plan were invested in either a bond, equity, money
market, capital appreciation, international equity, emerging markets equity, or
diversified fund as directed by each employee.
During 1995, the Bank adopted nonqualified deferred compensation plans
(the "Plans") for each officer for whom contributions under the ESOP are limited
by the applicable provisions of the Internal Revenue Code. Bank contributions
under the Plans totaled $56,432, $51,653 and $35,755 in 1999, 1998 and 1997,
respectively.
10. COMMITMENTS AND CONTINGENT LIABILITIES
Leases--The Bank is obligated under various leases covering certain equipment,
branches, office space and the land on which its head office is built. The
minimum payments under these leases, certain of which contain escalation
clauses, are:
- --------------------------------------------------------------------------------
2000 .............................................................. $1,110,094
2001 .............................................................. 1,126,126
2002 .............................................................. 1,128,072
2003 .............................................................. 1,045,839
2004 .............................................................. 975,546
Remainder to 2011 ................................................. 2,642,805
- --------------------------------------------------------------------------------
Total ............................................................. $8,028,482
================================================================================
Rent expense was approximately $1,039,000, $982,000 and $858,000 for 1999,
1998 and 1997, respectively.
Directors' Incentive Retirement Plan--The Company has a Directors' Incentive
Retirement Plan for former directors of the Company who elect to retire after
having completed certain minimum service requirements. Under the retirement
plan, directors who elect to retire are entitled to receive, for a period of
five years after such retirement, certain compensation, as defined in the
retirement plan, as long as such director continues to consult with the Company
in an advisory capacity (or, if the director expires prior to the completion of
the consulting period, the beneficiary or estate designated by the director is
entitled to receive such remaining compensation).
In 1992, the Company adopted a new retirement plan, whereby five
individuals (four directors and the secretary to the Board of Directors), who
had been eligible to receive benefits under the old retirement plan, agreed to
cancel and surrender their rights in the old retirement plan in exchange for the
terms of the new retirement plan. The new retirement plan provides for the
payment of certain compensation annually to these five individuals through March
1, 2007. These individuals must be available to consult with the Company in an
advisory capacity during this period (or, if the director or secretary expires
prior to the completion of the consulting period, the beneficiary or estate
designated by the director or secretary is entitled to receive such remaining
compensation).
Directors' Stock Plan--The Company approved a Directors' Stock Plan in 1998 for
each outside director and the secretary to the Board of Directors. Commencing
January 1, 1999, and on January 1 of each subsequent year, each participant will
be granted an award of 100 share credits for the preceding year of service. Each
participant will also receive share credits for cash or stock dividends that
would have been paid if the share credits had been actual shares. Awards shall
be paid after the participant has ceased to be a director or secretary. If the
participant expires, the shares will be awarded to his/her beneficiary or
estate. There are 105,000 shares reserved for possible issuance.
During 1999, 1998 and 1997, the Bank charged approximately $82,000,
$126,000 and $133,000, respectively, to operations relating to the retirement
and stock plans.
Severance Commitments--The Company has five Executive Severance Plans (the
"Plans") for certain key executives who are full-time employees of the title of
Senior Vice President and above and who are designated as Plan participants by
the Board of Directors. The Plans provide for certain rights accruing to
participants in the event of a termination of the participant's employment
within one year after a change in control of the Company. These rights include a
cash payment and the continuation of certain employee benefits. In addition, all
stock options held by a participant will become immediately exercisable. In the
event that the participant enters into an employment contract, as defined in the
Plans, all rights to the severance payment and other benefits set forth above
will terminate. No amounts have been paid or accrued under the Plans.
Pending Claims and Contingent Liabilities--There are various pending claims and
contingent liabilities arising in the normal course of business which are not
reflected in the accompanying consolidated financial statements. Management
considers that the aggregate liability, if any, resulting from pending claims
and contingent liabilities will not be material.
Other--The Bank is required to maintain balances with the Federal Reserve Bank
of New York to satisfy reserve requirements. These balances averaged
approximately $831,000 and $3,391,000 in 1999 and 1998, respectively.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------25
11. STATE BANCORP, INC. (PARENT COMPANY ONLY)
Certain condensed financial information follows (dollars in thousands):
--------
December 31, 1999 1998
- --------------------------------------------------------------------------------
BALANCE SHEET
Assets:
Cash ............................................. $ 182 $ 636
Dividends receivable and other assets ............ 1,001 1,023
Investment in the Bank ........................... 56,029 60,311
- --------------------------------------------------------------------------------
Total Assets ....................................... $ 57,212 $ 61,970
================================================================================
Liabilities ........................................ $ 1,109 $ 1,112
- --------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock .................................. -- --
Common stock ..................................... 35,391 32,967
Surplus .......................................... 29,493 24,236
Retained earnings ................................ 5,119 4,867
Treasury stock ................................... (919) (188)
Accumulated other comprehensive income ........... (12,501) (365)
Unearned compensation ............................ (480) (659)
- --------------------------------------------------------------------------------
Total Stockholders' Equity ......................... 56,103 60,858
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ......... $ 57,212 $ 61,970
================================================================================
--------
<TABLE>
<CAPTION>
--------
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------
INCOME STATEMENT
<S> <C> <C> <C>
Dividends from the Bank ........................ $ 3,453 $ 3,344 $ 2,668
Equity in the undistributed earnings of the Bank 6,876 4,859 4,437
- -----------------------------------------------------------------------------------
Net Income ..................................... $ 10,329 $ 8,203 $ 7,105
===================================================================================
CASH FLOWS
Operating Activities:
Net income ................................... $ 10,329 $ 8,203 $ 7,105
Decrease (increase) in other assets .......... 22 3 (426)
(Decrease) increase in other liabilities ..... (3) 332 --
Equity in the undistributed earnings
of the Bank ................................ (6,876) (4,859) (4,437)
- -----------------------------------------------------------------------------------
Net cash provided by operating activities ...... 3,472 3,679 2,242
- -----------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid .......................... (3,327) (3,295) (2,538)
Proceeds from issuance of common stock ....... 980 1,143 887
Capital contribution to the Bank ............. (849) (879) (4,833)
Payment to repurchase common stock ........... (730) (188) --
- -----------------------------------------------------------------------------------
Net cash used in financing activities .......... (3,926) (3,219) (6,484)
- -----------------------------------------------------------------------------------
Net Changes in Cash ............................ $ (454) $ 460 $ (4,242)
===================================================================================
--------
</TABLE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby and
documentary letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
financial statements. The Company has not engaged in derivatives activities for
any of the reported periods.
The Bank's exposure to credit loss in the event of nonperformance by third
parties for commitments to extend credit and letters of credit is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral required varies, but may include
accounts receivable, inventory, equipment, real estate, and income-producing
commercial properties. At December 31, 1999 and 1998, commitments to originate
loans and commitments under unused lines of credit for which the Bank is
obligated amounted to approximately $125,318,000 and $120,688,000, respectively.
Letters of credit are conditional commitments issued by the Bank
guaranteeing payments of drafts in accordance with the terms of the letter of
credit agreements. Commercial letters of credit are used primarily to facilitate
trade or commerce and are also issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. Collateral may be required to support letters of credit based upon
management's evaluation of the creditworthiness of each customer. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Most letters of credit
expire within one year. Management does not anticipate any material losses as a
result of these transactions. At December 31, 1999 and 1998, the Bank had
letters of credit outstanding of approximately $4,611,000 and $3,933,000,
respectively.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of financial instruments and market information. Where
available, quoted market prices are used. However, markets do not exist for a
portion of the Bank's financial instruments and, as a result, fair value
estimates require judgements regarding future cash flows. These judgements are
subjective in nature, involve uncertainties and therefore may change
significantly at future measurement dates. The fair value information that
follows is intended to supplement, but not replace, the basic consolidated
financial statements and other traditional financial data presented throughout
this report. The calculation of estimated fair values is based on market
conditions at December 31, 1999 and 1998 and is not reflective of current or
future fair values. Furthermore, the value of long-term relationships with
depositors is not reflected. The value of those relationships is significant.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Short-Term Investments--For cash and short-term investments (due from
banks, Federal funds sold, securities purchased under agreements to resell,
accrued interest receivable and certain other short-term assets), the carrying
amount is a reasonable estimate of fair value.
Securities Held to Maturity and Securities Available for Sale--For securities
held to maturity and securities available for sale, the estimated fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using a quoted market price for similar
securities.
Loans--The fair value of loans is estimated by discounting the expected future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
<PAGE>
Notes to Consolidated Financial Statements
(continued)
- ------------------------------------------------------------------------------26
Deposits--The fair value of demand deposits, savings accounts and time deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other Short-Term Liabilities--Other short-term liabilities (Federal funds
purchased, securities sold under agreements to repurchase, accrued interest
payable and certain other short-term liabilities) are considered to have fair
values equal to their carrying amounts due to their short-term nature. These
instruments are presented in the table below as other short-term liabilities.
Commitments to Extend Credit, Standby Letters of Credit and Commercial Letters
of Credit--The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counter parties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of standby letters of credit and commercial letters of credit is
based on fees currently charged for similar agreements.
The estimated fair values of the Bank's financial instruments, in
thousands, are as follows:
---------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and short-term
investments ................ $ 73,819 $ 73,819 $ 25,889 $ 25,889
Securities held to maturity
and securities available
for sale ................... 377,431 377,428 281,855 281,865
Loans--net of the allowance
for possible loan losses ... 481,842 488,362 414,848 430,084
- --------------------------------------------------------------------------------
Total .......................... $933,092 $939,609 $722,592 $737,838
================================================================================
Financial liabilities:
Deposits ..................... $804,463 $804,411 $597,021 $598,523
Other short-term liabilities . 85,618 85,618 70,860 70,860
- --------------------------------------------------------------------------------
Total .......................... $890,081 $890,029 $667,881 $669,383
================================================================================
---------------------
14. REGULATORY MATTERS
Dividends paid by the Company are subject to restrictions by certain
regulatory agencies. Under these restrictions, approximately $12,959,000 was
available for payment of dividends at December 31, 1999, without prior approval
of those regulatory agencies.
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
the capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and the Bank's
classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
capital and Tier I capital, as defined in the regulations, to risk weighted
assets and of Tier I capital to average assets. Management believes, as of
December 31, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------27
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category. The Company's and the Bank's capital amounts and ratios are as follows
(in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Tier I Capital to Total Adjusted Average Assets (Leverage):
The Company ............................................. $68,241 7.02% $38,884 4.00% N/A N/A
The Bank ................................................ $68,167 7.04% $38,731 4.00% $48,414 5.00%
Tier I Capital to Risk Weighted Assets:
The Company ............................................. $68,241 11.78% $23,172 4.00% N/A N/A
The Bank ................................................ $68,167 11.69% $23,325 4.00% $34,987 6.00%
Total Capital to Risk Weighted Assets:
The Company ............................................. $75,348 13.01% $46,332 8.00% N/A N/A
The Bank ................................................ $75,274 12.91% $46,645 8.00% $58,307 10.00%
- ------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------
As of December 31, 1998:
Tier I Capital to Total Adjusted Average Assets (Leverage):
The Company ............................................. $60,823 8.05% $30,208 4.00% N/A N/A
The Bank ................................................ $60,276 7.98% $30,214 4.00% $37,760 5.00%
Tier I Capital to Risk Weighted Assets:
The Company ............................................. $60,823 12.82% $18,982 4.00% N/A N/A
The Bank ................................................ $60,276 12.64% $19,077 4.00% $28,615 6.00%
Total Capital to Risk Weighted Assets:
The Company ............................................. $66,611 14.04% $37,965 8.00% N/A N/A
The Bank ................................................ $66,064 13.85% $38,153 8.00% $47,691 10.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Independent Auditors' Report
- ------------------------------------------------------------------------------28
To the Board of Directors and Stockholders of
State Bancorp, Inc.
New Hyde Park, New York
We have audited the accompanying consolidated balance sheets of State
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of State Bancorp, Inc. and
subsidiary at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 28, 2000
<PAGE>
Management's Discussion and Analysis of STATE BANCORP, INC. AND SUBSIDIARY
Financial Condition and Results of Operations
- ------------------------------------------------------------------------------29
OVERVIEW
State Bancorp, Inc. (the "Company") is a one-bank holding company, which
was formed on June 24, 1986. The Company operates as the parent for its
wholly-owned subsidiary, State Bank of Long Island and subsidiaries (the
"Bank"), a New York State chartered commercial bank founded in 1966. The income
of the Company is derived through the operation of the Bank and its
subsidiaries, SB Portfolio Management Corp. ("SB Portfolio"), SB Financial
Services Corp. ("SB Financial"), New Hyde Park Leasing Corp. and SB ORE Corp.
The Bank serves its customer base through nine full-service branches and a
lending center in Jericho. Of the Bank's branch locations, five are in Nassau
County and four are located in Suffolk County. The Bank offers a full range of
retail banking services to individuals, corporations, municipalities and small
to medium-sized businesses. Retail products include checking accounts, NOW
accounts, money market accounts, passbook and statement savings accounts,
certificates of deposit, individual retirement accounts, commercial loans,
personal loans, residential, construction, home equity, commercial mortgage
loans, consumer loans and small business lines of credit. In addition, the Bank
also provides access to annuity products, mutual funds, discount brokerage
services and, through its association with U.S. Trust Company, a full range of
wealth management and financial planning services.
SB Portfolio and SB Financial, based in Wilmington, Delaware, each
wholly-owned subsidiaries of the Bank, were formed in 1998. SB Portfolio
provides investment management services to the Bank and the Company while SB
Financial provides balance sheet management services such as interest rate risk
modeling, asset/liability management reporting and general advisory services to
the Bank.
For the year ended December 31, 1999, the Company again recorded record
levels of earnings, loans, investment securities, core deposits and Tier I
capital. The following discussion is intended to provide the reader with further
insight into the principal factors contributing to the financial results of the
Company and its operating subsidiary for the periods shown. It should be read in
conjunction with the consolidated financial statements and notes thereto for a
full understanding of this analysis.
The Company's 1999 performance is discussed in detail on the following
pages. Certain statements contained in this discussion are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are based on management's current
expectations regarding a range of issues that could potentially impact the
Company's performance in future periods. Forward-looking statements are subject
to risks and uncertainties which may cause actual results to differ materially
from those discussed herein.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Summary of Financial Performance
The Company achieved its twenty-ninth consecutive year of record earnings
during 1999. Net income improved by 25.9% to $10.3 million or $1.48 basic
earnings per common share in 1999 versus $8.2 million or $1.19 per share in 1998
(per share earnings have been adjusted to reflect the impact of the 6% stock
dividend declared by the Company during 1999). Fully diluted earnings per common
share were $1.46 and $1.17 in 1999 and 1998, respectively. Growth in net
interest income (up 17.7%) and other income (up 40.0%) and a lower effective
income tax rate were the principal reasons for the improved earnings during
1999. The increase in net interest income resulted from an expanded
interest-earning asset base, primarily through growth in the commercial loan
portfolio. Somewhat offsetting the foregoing factors were increases in operating
expenses, principally salaries and benefits, and the provision for loan losses.
The Company's capital position, by all industry-standard measures, remains
strong. The ratio of average total stockholders' equity to average total assets
was 7.16% and 7.93% in 1999 and 1998, respectively. Based upon banking industry
regulatory guidelines, a "well capitalized" institution must maintain a Tier I
leverage ratio of at least 5.00% and Tier I and total capital to risk-weighted
assets ratios of at least 6.00% and 10.00%, respectively. At December 31, 1999,
the Company's Tier I leverage ratio was 7.02% while its risk-weighted ratios
were 11.78% for Tier I capital and 13.01% for total capital. These ratios are
substantially in excess of the foregoing regulatory guidelines and also compare
favorably to the Company's peers.
The continued growth in net income during 1999 resulted in substantial
improvements in each of the Company's primary measures of financial performance.
During 1999, return on average assets increased by 12 basis points versus 1998
to 1.23%, while the return on average equity improved to 17.35%, an increase of
319 basis points from 1998's level. The improved financial performance ratios
achieved during 1999 result from efficient leveraging of the Company's capital
base. Growth in interest-earning assets was accompanied by a 14 basis point
improvement in the net interest margin to 4.61% and a reduction in the Company's
operating efficiency ratio from 54.4% in 1998 to 51.7% in 1999.
The Company's primary trade area, Nassau and Suffolk Counties on Long
Island, enjoyed another year of strong economic growth and expansion during
1999. The Long Island economy continues to transform itself into a dynamic
high-tech incubator for cutting edge "dot.com" companies from one that was
largely dependent on one industry for job creation less than a decade ago. The
primary strength of the local economy now is its great diversity. Long Island
has become a fertile growth area for small business creation, particularly in
the high-tech, medical and services sectors. The Company is an active
participant in lending to small businesses in a wide variety of Long Island
industries. Loan demand was strong throughout 1999. On a year to year basis,
total loans grew by 16.2% versus 1998. Although most statistics continue to
point to a continuation of recent economic conditions in 2000, the recent
increase in short-term interest rates may begin to cool off capital investment
within
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------30
the Company's customer base. The Long Island marketplace is among the most
competitive in the country, and management is well aware that past performance
is not indicative of future results. Intense competition from commercial and
savings banks, financial services conglomerates and insurance companies has
created a virtual banking industry where consumers and businesses alike can
obtain loans online and invest in CDs and mutual funds with institutions across
the country, or around the world, sweep idle balances into a wide variety of
investments, all by the click of a mouse from their home or office on a "24/7"
basis. As a result of recent congressional legislation, this full-court press by
both new and traditional competitors will only accelerate in the months and
years to come. Relationships are no longer of paramount importance for many
businesses or consumers. Convenience, flexibility and technology have created a
new paradigm in banking. The transactional nature of the banking industry has
created pricing concerns for management relative to the credit risk of the
Company's small business borrower base. Intense competition, along with an ever
growing sophistication among consumers and corporate treasurers makes
management's outlook for 2000 one of guarded optimism. The current economic
expansion continues to set new records each month. Management of the Company is
aware of the current economy's position in the longest post-war business
expansion on record and has chosen to be very cautious with respect to granting
credit to current and prospective borrowers. For these reasons, it is likely
that 2000 will see loan growth of 5% to 7% in the Company's core competencies of
commercial and industrial credits and commercial mortgages but at spreads that
are likely to narrow somewhat from current levels. This scenario, combined with
rising short-term interest rates that increase funding costs for the Company,
will result in net interest margin compression during 2000. Additional asset
growth will likely come from the fixed income investment portfolio at narrower
margins than the loan portfolio produces. The Company will continue to
aggressively pursue expense reductions and operating efficiencies along with
revenue-generating sales initiatives to offset a portion of the shortfall in net
interest income. The outlook for interest rates in 2000 is not crystal clear,
but it does appear that short-term rates will continue to rise during the first
six months of the year or until the Federal Open Market Committee sees evidence
of a slowdown in economic expansion. Management expects that the upcoming year
will provide significant challenges for the Company. By continuing our
philosophy of Measured, Orderly Growth, maintaining a "Customer First" attitude
and adhering to the ideals contained in our mission statement, the Company has
been able to apply a consistent standard of excellence that we feel will produce
yet another year of record earnings during 2000.
INFORMATION SERVICES
Moving at Net Speed
The phrase "moving at net speed" has entered the language lexicon during
the past couple of years. It describes the hyper pace of change that occurs on
the Internet and to companies that operate there. This phrase has also moved
into use in the banking industry as financial services companies realize that
they can no longer conduct business as usual if they want to thrive in the new
millennium. Management of the Company realized that "business as usual" no
longer exists for us or for our customer base. Harnessing the power of the
Internet and emerging technology is no longer a luxury for community banks; it
is an essential element of corporate strategy to compete with the vast array of
competitors that now occupy the banking landscape. The Company's customer base,
commercial, municipal and consumers alike, demand "24/7" access to their account
information. State Bancorp has become a "click and mortar" organization capable
of operating around the clock or around the corner, depending on each customer's
unique needs. With products such as Touch24 and Business Direct Access and with
a corporate website, www.statebankofli.com, the Company's business and consumer
clientele can be in touch with their money when it is convenient for them.
During 1999, the Company devoted significant resources to addressing the
Y2K issue. With that project now just a fond memory, projects such as check and
document imaging and Internet banking will become realities within the next
eighteen months. Check imaging will simplify account management for customers,
eliminate the need to file cancelled checks and create great flexibility for
corporate treasurers that may utilize a CD-ROM option for monthly account
reconcilement. Document imaging will improve customer service by reducing
research time for branch and loan department personnel. This system will enable
the Company to convert its paper documents to images with the ability to store
and retrieve the documents within seconds. Finally, Internet banking is expected
to be offered to customers in the early part of 2001. This project is being
spearheaded by our Management Information Systems group and, upon completion, it
will provide a level of convenience and flexibility usually only associated with
far larger institutions. State Bancorp, Inc. will continue to utilize emerging
technologies to better serve customers in every market that we serve.
Year 2000 Compliance
The Company's Y2K Action Team was formed in 1996 to address the
anticipated century date change problem and ensure a smooth transition for both
customers and staff. Prior to year-end 1999, the Y2K Action Team had completed
each of the four phases of the Y2K project: Awareness, Assessment, Renovation
and Validation. The result of this effort was a smooth transition to the new
millennium with no systems problems whatsoever. All Company systems have been up
and running without any downtime at all. All critical Company systems will
continue to be monitored throughout 2000. In addition to the foregoing
systems-related effort, management of the Company was in constant contact with
major retail, commercial and institutional customers as well as third party
vendors to be certain that the Company would not be impacted by the failure of
an outside entity.
The Company does not develop any of its own computer programs internally
nor does it employ a programming staff. All of the software related to its major
application systems has been pur-
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------31
chased from third-party vendors. Generally, software provided by third parties
and included in the Company's systems is developed by leading software suppliers
that provided their own Y2K quality assurance and compliance. Each of the
Company's business units had incorporated their unique risks into a modified
business resumption plan prior to year-end 1999.
Monitoring and managing the Y2K Project resulted in additional direct and
indirect costs to the Company. Direct charges included charges by third-party
software vendors for product enhancements, costs involved in testing software
products for Y2K compliance, training, and any resulting costs for developing
business resumption contingency plans for any mission-critical Y2K problems.
Indirect costs principally consisted of the time devoted by employees to
monitoring software vendor progress, testing enhanced software products and
implementing any contingency plans. The Company's total costs related to the Y2K
problem were approximately $259 thousand, of which $164 thousand was related to
the costs to enhance or replace existing software and hardware. The balance of
the Y2K-related expenses represents the redeployment of existing resources
within the Company. Both direct and indirect costs of addressing the Y2K problem
were charged to earnings as incurred, were provided by operations and were
included in existing operating budgets. Two of the Company's other information
technology projects, document and check imaging and Internet banking, were
delayed due to the completion of the Y2K project. These projects, and others,
will now be undertaken as part of the Company's ongoing efforts to provide the
very latest technology to its customer base to enhance their banking experience.
The preceding Y2K discussion contained various forward-looking statements
that represent the Company's beliefs or expectations regarding future events.
When used in the Y2K discussion, the words "believes," "expects," "estimates"
and similar expressions are intended to identify forward-looking statements. All
forward-looking statements involve a number of risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize or
should any of the underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company does not intend to update these
forward-looking statements.
NET INTEREST INCOME
1999 versus 1998
Net interest income, the difference between interest earned on loans and
investments and interest paid on deposits and borrowed funds, provides the
Company's primary source of operating earnings. Net interest income is affected
by the level and composition of assets, liabilities and stockholders' equity, as
well as changes in market interest rates. Net interest income increased by 17.7%
to $36.0 million in 1999 as the result of growth in average interest-earning
assets of $98 million (14.0%). Growth in loans and taxable Government Agency
securities accounted for the vast majority of the asset expansion. Increases in
commercial loans and commercial mortgages led the $64 million or 16.7% increase
in average loans outstanding in 1999 versus 1998. Average investment securities
increased by $71 million or 27.9% due to a $98 million increase in Government
Agency paper, primarily callable issues with five- to ten-year final maturities.
This growth was funded in part by cash flows from the Company's mortgage-backed
portfolio and maturities and sales of local tax-exempt municipal issues. A
majority of the Company's investment portfolio is owned and managed by SB
Portfolio Management Corp., a wholly-owned subsidiary of State Bank of Long
Island located in Wilmington, Delaware. Earning asset growth in 1999 followed
increases of 15.1% and 10.1% in 1998 and 1997, respectively. Also funding the
asset expansion were increases in core deposits, principally demand deposit
balances, large denomination certificates of deposit, money fund accounts and
securities sold under agreements to repurchase (repos).
Average core deposit (defined as demand deposits, NOW accounts, money fund
and savings accounts) balances increased by $28 million or 8.5% to $353 million
in 1999. The growth and retention of low-cost core deposit balances is among the
most daunting management challenges in banking today. A vast array of
competitors exists for these valuable deposits. Management of the Company
continually strategizes over new and unique ways to expand these deposits since
this is a key element in the Company's growth strategy. These low-cost deposits
also are critical to the Company's efforts to widen its net interest margin.
During 1999 and 1998, average core deposit balances represented 50% and 51% of
total deposits, respectively. Growth in the commercial banking sector and an
expanded municipal banking department which resulted in new relationships
throughout Long Island were responsible for the growth in all core deposit
categories. Average demand deposit balances grew by 19.1% and 15.4% in 1999 and
1998, respectively, and have increased by approximately 100% on average since
1995. During 1999, the Company's net interest margin improved to 4.61%, from
4.47% a year ago. The wider margin resulted from a shift in the earning-asset
mix to a greater dependence on higher-yielding loans and Government Agency
investment securities. Growth in these asset categories was funded by core
deposit growth and by maturities and sales of lower-yielding assets. The
increase in core deposit funding previously described contributed to a 26 basis
point decline in the average rate paid on the Company's supporting funds to
3.14% in 1999. Also funding asset growth were increases in large denomination
certificates of deposit and short-term repos. Although the use of these market
rate funds adds incrementally to net interest income, their funding spread is
somewhat narrower than the Company's overall net interest margin and, therefore,
causes some margin compression relative to the use of core deposits and retained
earnings. Management anticipates a nominal expansion of the net interest margin
in 2000 as demand deposit balances and loan volumes are each projected to
increase. The interest rate outlook, however, is somewhat uncertain for the next
twelve months. Future rate increases may cause funding costs to grow at a faster
pace than asset margins, thereby causing a decline in net interest margin.
Management
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------32
of the Company expects that the continued maturation of the Suffolk County
branches opened in late 1997 will provide access to additional low-cost sources
of funds as well as provide ample opportunity to expand the Company's loan
portfolio in previously under-served areas of the county. In addition, the
Company has plans to expand its branch network further east in Suffolk County as
well as into Queens County in 2000. As has been the case with recent branch
openings, the Company expects that these new locations will produce additional
commercial banking relation ships, both for deposits and loans, that will
enhance profitability in 2000 and beyond.
Average total loans grew by 16.7%, 6.8% and 15.0% in 1999, 1998 and 1997,
respectively. This growth, which has occurred despite intense competition from
competitors ranging from small credit unions to financial services behemoths
such as Citigroup and American Express, has been achieved with no adverse impact
on credit quality. The Company, with no additional lenders, took advantage of
Long Island's strong local economy in 1999 and was able to generate quality loan
growth in a very competitive marketplace. The combination of low interest rates
and low inflation has driven both the local and national economies during the
past several years. The Company's customer base has actively sought to increase
their lines of credit and make additional investments in property, plant,
equipment and residences during this very favorable economic climate. The
Company has responded by developing new products such as its Business Direct
Access cash management tool, and the Small Business Line of Credit and Prime For
Life home equity offering. These innovative products, coupled with responsive
and personal customer service that are second to none, have enabled the Company
to take advantage of opportunities presented by the continued consolidation of
the local banking market. Average commercial loans, commercial mortgages and
tax-exempt lending grew at rates of 14.7%, 17.5% and 39.5%, respectively, in
1999. At December 31, 1999, total loans outstanding amounted to $489 million, up
16.2% when compared to the comparable 1998 date. The year-end loan portfolio was
comprised of approximately 46% commercial loans, 40% commercial mortgages, 6%
residential mortgages and 8% all other loans. It is expected that the 2000 loan
mix will remain, on a percentage basis, approximately the same as 1999.
Based upon recent local and national economic forecasts, management of the
Company is confident that loan growth will be strong in 2000, though at a rate
similar to that experienced in 1998, not nearly at the rates of growth seen in
the past year. A continuation of the banking industry's recent consolidation and
an expanded effort to penetrate the central and eastern Suffolk and Queens
County marketplaces are expected to provide substantial opportunity to continue
to increase the loan portfolio over the next 12-18 months. Management of the
Company is committed to quality loan growth. A comprehensive credit and peer
review process provides a quality control tool to ensure that only high quality
loans are brought to credit committee for consideration.
1998 versus 1997
Net interest income expanded by $2.6 million or 9.4% during 1998 as the
result of growth in interest-earning assets of $64 million. The asset expansion
resulted from increases in short-term money market instruments (up $27 million),
commercial loans and commercial mortgages (up $24 million in total) and taxable
investment securities, primarily callable government agency issues. Funding the
growth in interest-earning assets were paydowns on mortgage-backed securities,
increases in core deposits, principally demand balances, and growth in large
denomination certificates of deposit, repos and other borrowed funds,
principally FHLB advances.
The foregoing shift in the Company's balance sheet mix resulted in a
slight narrowing of the net interest rate margin to 4.47% from 4.52% in 1997.
The lower spread was due to a shift in the interest-earning asset mix to greater
concentration of lower-yielding money market instruments than in the previous
year. A slower rate of loan growth in 1998 coupled with generally lower interest
rates throughout the year more than offset the Company's lower cost of funds.
Growth in interest-free demand deposits and equity capital utilized to fund the
asset growth helped to cause a ten basis point decline in the cost of funds to
3.44%.
INVESTMENT SECURITIES
SFAS No. 115 requires the Company, at the time of purchase, to designate
each investment security as either "available for sale"("AFS"), "held to
maturity" or "trading," depending upon investment objectives, liquidity needs
and ultimate intent. Securities available for sale are stated at the lower of
aggregate cost or market value, with unrealized gains or losses reported as a
separate component of stockholders' equity until realized. Securities held to
maturity are stated at cost, adjusted for amortization of premium or accretion
of discount, if any. Trading securities are generally purchased with the intent
of capitalizing on short-term price differences by selling them in the near
term. The Company did not hold any trading securities at December 31, 1999 and
1998.
At December 31, 1999, the Company held $377 million in AFS securities
(99.9% of the investment portfolio) at a pre-tax unrealized net loss of $19.3
million, up from $590 thousand at year-end 1998. This significant increase
resulted from a combination of higher interest rates in 1999 and the negative
convexity present in the callable Agency securities in the Company's portfolio.
As rates rise, these securities decline in value and are less likely to be
called prior to maturity. At year-end 1999, the AFS portfolio was divided into
the following categories: 70% callable U.S. Government Agency securities; 23%
local municipal paper (maturities of less than one year); 6% MBS securities
(mainly FNMA and GNMA obligations); and 1% all other securities, primarily FHLB
stock. The held to maturity portion of the portfolio which totaled less than $1
million, was comprised of short-term local municipal notes. Approximately half
of the growth in the
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------33
Company's investment portfolio took place in the U.S. Government Agency
category. Agency holdings increased by $66 million at year-end 1999 versus the
same period a year ago. These securities are all callable within two years, and
most have final maturities of less than ten years. As previously stated, the
rising rate environment present throughout 1999 makes it likely that these
securities will not be called in the near future. They are, however, AAA credits
that provide a very competitive yield well in excess of the Company's
incremental funding cost and are pledgeable to secure municipal deposits and
other borrowings. The Company's investment policy is conservative and has
liquidity and safety paramount among its objectives. The Company's portfolio of
tax-exempt local municipal notes increased by $65 million at year-end 1999
versus the comparable 1998 date. The Company continues to expand its municipal
relationships and, as a natural outgrowth of that business, purchases short-term
(one year or less) municipal paper. Much of the municipal paper that is
purchased is classified as available for sale and eventually sold into the
secondary market when market conditions are favorable. During 1999, the
Company's holdings of mortgage-backed securities declined by $19 million as the
result of principal paydowns. This follows paydowns of $20 million in 1998.
Management expects that this trend will continue in 2000, but at a slower rate,
due to the current and forecasted interest rate.
The Company's investment portfolio is low-risk in nature due to its
concentration of U.S. Government Agency, local municipal notes and AAA-rated MBS
balloon and pass-through securities. As of December 31, 1999, the MBS portfolio
had an average life of approximately 2 years after adjusting for historical
prepayment patterns. Approximately 35% of the MBS portfolio, including
collateralized mortgage obligations ("CMOs"), had final maturities in excess of
five years. In general, principal prepayments on these securities will increase
as interest rates fall and, conversely, prepayments will slow down as interest
rates rise. CMOs accounted for approximately 1% of the total investment
portfolio as of year-end 1999. None of the CMOs held by the Company met the
regulatory definition of a high-risk security nor did the Company own any
structured notes as of December 31, 1999. The Government Agency portfolio,
callable in 2000 and 2001, had final maturities in the seven- to fifteen-year
maturity range.
The Company's investment subsidiary, SB Portfolio Management Corp. ("SB
Portfolio"), which was initially capitalized in 1998, continued to grow
throughout 1999. Located in Wilmington, Delaware, this subsidiary now holds and
manages approximately 51% of the Company's investment securities. The vast
majority of securities domiciled with SB Portfolio are callable Agency issues;
however, a portion of its portfolio is also dedicated to tax-exempt paper as
well. SB Portfolio has its own investment policy and Board of Directors,
however, it still adheres to the stringent safety and quality standards present
throughout the Company in its investment evaluation process. Management of the
Company expects that SB Portfolio will continue to grow in 2000 through the
reinvestment of its own interest income as well as through additional capital
infusions from the parent company if market conditions warrant.
SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
One of management's main objectives is to maintain a high quality loan
portfolio in all economic climates. This objective is achieved by maintaining
high underwriting standards coupled with regular evaluation of each borrower's
creditworthiness and risk exposure. Management seeks to avoid loan
concentrations within industries and customer segments in order to minimize
credit exposure. The Company's senior lending personnel work in conjunction with
line lenders to determine the level of risk in the Company's loan-related assets
and establish an adequate level for the allowance for possible loan losses. An
outside loan review consultant is also utilized to independently verify the loan
classifications and the adequacy of the allowance for possible loan losses.
Management actively seeks to reduce the level of nonperforming assets, defined
as nonaccrual loans and other real estate owned, through aggressive collection
efforts and, where necessary, litigation and charge-off. Other real estate owned
properties are aggressively marketed for sale utilizing local commercial and
residential realtors, where necessary.
Management of the Company recognizes that, despite its best efforts to
minimize risk through a rigorous credit review process, losses will occur. In
times of economic slowdown, either regional or nationally, the risk inherent in
the Company's loan portfolio will increase. The timing and amount of loan losses
that occur is dependent upon several factors, most notably current and expected
economic conditions and the financial condition of the Company's borrowers. The
allowance for loan losses is available to absorb charge-offs from any loan
category, while additions are made through the provision for loan losses, which
is a charge to operating earnings. The adequacy of the provision and the
resulting allowance for loan losses is determined by management's continuing
review of the loan portfolio, including identification and review of individual
problem situations that may affect a borrower's ability to repay, delinquency
and nonperforming loan data, collateral values, regulatory examination results
and changes in the size and character of the loan portfolio. Thus, an increase
in the size of the loan portfolio or in any or its components could necessitate
an increase in the allowance even though credit quality and problem loan totals
may be improving.
As illustrated in Table I, the Company's nonperforming assets increased by
$814 thousand to $5.2 million at year-end 1999 versus 1998 following a $67
thousand decline in 1998 versus 1997. At December 31, 1999, total nonperforming
assets, defined by the Company as nonaccrual loans and other real estate owned,
as a percentage of loans and other real estate owned grew nominally to 1.06% as
compared to 1.04% and 1.18% at year-end 1998 and
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------34
1997, respectively. Nonaccrual loans as a percentage of total loans increased to
1.06% at year-end 1999 versus 0.87% and 1.13% at the comparable 1998 and 1997
dates. The year-end 1999 increase in nonperforming assets, as defined by the
Company, resulted from a $1.5 million increase in nonaccrual loans, which was
somewhat offset by a decline in other real estate owned of $704 thousand
resulting from the sale of two properties during 1999. These sales were
accomplished with a very negligible impact on the Company's consolidated
statement of income. The growth in nonaccrual loans during 1999 resulted from
the transfer of a large commercial real estate loan from the restructured,
accruing category in 1998. This loan, which is collateralized by commercial real
estate with a current appraised value in excess of the carrying value of the
credit, was partly written down during 1999 and transferred to nonaccrual status
when the collection of interest became doubtful. Management actively reviews
this credit and it consumes substantial managerial resources throughout the
year, however, it is unlikely to move to full accrual status during 2000.
Management of the Company actively reviews the level and composition of
nonperforming assets. During 1999, this meant a continuation of recent years'
strategy of collection through litigation combined with enhanced collateral
positions on virtually all nonperforming assets. The result in 1999 was a
substantial decline in the total level of nonaccrual loans, restructured,
accruing loans and loans 90 days or more past due and still accruing. The total
level of these assets declined by $5.7 million during 1999 to $5.6 million. This
substantial improvement in quality resulted in an improved coverage ratio at
year-end. The allowance for loan losses as a percentage of nonaccrual loans
declined slightly to 137% from 157% at year-end 1998, however, the allowance for
loan losses as a percentage of nonaccrual loans, restructured, accruing loans
and loans 90 days or more past due and still accruing improved dramatically
during 1999 to 127% from 55% and 39% in 1998 and 1997, respectively. As outlined
in the Company's recent Form 10-Q filings and previously discussed herein, one
commercial mortgage credit now totaling $3.5 million was restructured during
1996 to a rate of interest below its contractual rate. Although the project has
been completed, this credit has been moved to nonaccrual status until cash flows
are again sufficient to support a market rate of interest. At December 31, 1999,
the Company's portfolio of restructured, accruing loans was comprised mainly of
loans which have demonstrated performance in accordance with the terms of their
restructure agreements, however, they did not yield a market rate of interest
subsequent to their restructuring.
Based upon current economic conditions, management has determined that the
current level of the allowance for loan losses is adequate in relation to the
risks present in the portfolio. Management considers, among other things,
delinquency trends, concentrations within segments of the loan portfolio as well
as recent charge-off experience when assessing the degree of credit risk in the
portfolio. Collateral appraisals and estimates of current value influence the
estimation of the required allowance balance at any point in time. The Company's
loan portfolio is concentrated in commercial and industrial loans and commercial
mortgages, the majority of which are fully secured by collateral with a market
value in excess of the carrying value of the individual loans. Although overall
loan quality continues to improve, management of the Company increased the level
of the provision for loan losses during 1999 in recognition of the year's strong
loan growth and the higher level of net charge-offs experienced ($1.7 million
versus $1.1 million in 1998). The provision for loan losses totaled $3.0 million
in 1999 versus $1.8 million in 1998 and $1.95 million in 1997. The resulting
allowance for loan losses balance of $7.1 million at December 31, 1999 amounted
to 1.45% of loans outstanding versus 1.38% in 1998 and 1.36% in 1997. Also
adding to the higher level of the allowance during 1999 was another strong year
for loan recoveries. Recoveries, although below 1998's level of $521 thousand,
amounted to $444 thousand, among the best years in recent Company history.
Although the local economy continued to grow and expand during the past year,
existing weaknesses in certain sectors of the economy may cause future problems.
The potential consequences of an increase in interest rates or a prolonged
economic slowdown in industries which impact the Company's borrower base, make
it difficult to forecast the impact on asset quality that will result during
2000 or any additional charge-offs that will be required during the year.
It is the present intent of management to further increase the level of
the allowance for possible loan losses to reflect any exposure represented by
fluctuations in the Long Island real estate market, and the underlying value
that that market provides as collateral to certain segments of the loan
portfolio. In recognition of the economic uncertainties previously elaborated
upon, the normal risks inherent in any credit portfolio and expected growth in
the loan portfolio, management anticipates that the 2000 provision for loan
losses will moderately exceed 1999's level. The provision is continually
evaluated relative to portfolio risk and regulatory guidelines and will continue
to be closely reviewed throughout 2000. In addition, various regulatory
agencies, as an integral part of their examination process, closely review the
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgment of information available to
them at the time of their examinations.
The Company has no foreign loans outstanding. The only concentration of
loans exceeding 10% of total loans is the Bank's loans totaling $77.5 million
from real estate operators, lessors, and developers. Repayment of these loans is
dependent in part upon the overall economic health of the Company's market area
and current real estate values. Management of the Company is not aware of any
trends, events or uncertainties that will have, or that are reasonably likely to
have, a material effect on the Company's liquidity, capital resources or future
operating results. For loans not separately disclosed herein, management is not
aware of information relating to any material credit that would impact the
ability of those borrowers to comply with loan repayment terms.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------35
TABLE I (dollars in thousands)
<TABLE>
<CAPTION>
Analysis of Nonperforming Assets at December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .......................................... $ 5,194(1) $ 3,676 $ 4,258 $ 5,869 $ 8,247
Other real estate ......................................... -- 704 189 1,027 --
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets ................................ $ 5,194 $ 4,380 $ 4,447 $ 6,896 $ 8,247
==============================================================================================================================
Restructured, accruing loans .............................. $ 422 $ 5,545(1) $ 7,289(1) $ 6,524(1) $ 3,344
==============================================================================================================================
Loans 90 days or more past due and still accruing interest $ 3 $ 1,352 $ 1,590 $ 1,228 $ 337
==============================================================================================================================
Total loans outstanding ................................... $488,948 $420,636 $377,633 $353,303 $287,643
Total stockholders' equity ................................ $ 56,103 $ 60,858 $ 54,930 $ 48,569 $ 40,588
Allowance for loan losses ................................. $ 7,107 $ 5,788 $ 5,124 $ 5,009 $ 3,004
Key ratios at December 31:
Allowance for loan losses as a percent of total loans ..... 1.45% 1.38% 1.36% 1.42% 1.74%
Nonaccrual loans as a percent of total loans .............. 1.06% 0.87% 1.13% 1.66% 2.87%
Nonperforming assets (2) as a percent of total
loans and other real estate ............................. 1.06% 1.04% 1.18% 1.95% 2.87%
Allowance for loan losses as a percent of nonaccrual loans 136.83% 157.45% 120.34% 85.35% 60.68%
Allowance for loan losses as a percent of nonaccrual loans,
restructured, accruing loans and loans 90 days or more
past due and still accruing interest .................... 126.50% 54.74% 39.00% 36.77% 41.95%
- ------------------------------------------------------------------------------------------------------------------------------
---------
</TABLE>
(1) Includes one credit totaling $3.5 million at December 31, 1999, $5.0
million at December 31, 1998 and 1997 and $4.7 million at December 31,
1996, which is collateralized by commercial real estate with a current
appraised value in excess of the carrying value of the credit. The
restructured rate on this credit will remain below the contractual rate
until cash flows are again sufficient to support a market rate of
interest.
(2) Excludes restructured, accruing loans and loans 90 days or more past due
and still accruing interest.
OTHER INCOME
1999 versus 1998
Other income increased substantially in 1999 when compared to 1998. Total
other income grew by 40.0% in 1999 versus 1998. Excluding net security losses,
other income would have totaled $2.5 million in 1999, up 57.9% over 1998. This
increase resulted from a growth in return item charges, ATM fees, wire transfer
fees, letter of credit fees, cash management fees and charges, annuity income
and merchant services fees. In addition to the foregoing improvements, the
Company recorded a $122 thousand nonrecurring gain on the sale of equity
securities received from the demutualization of an insurance company from which
the Company had previously purchased life insurance policies. Somewhat
offsetting these improvements was a higher level of net security losses. The
1999 increase reverses the trend of declines recorded in 1998 (6.2%) and 1997
(12.0%). If securities transactions are excluded from other income, the Company
would have recorded a 5.4% reduction in other income during 1998 and a reduction
of 2.0% in 1997.
Return item charges represent the Company's primary source of other
income. These fees increased by 54.8% in 1999 versus 1998 as the result of an
increase in volume related to the addition of several large new commercial
deposit relationships coupled with an increase in the statutory ceiling rate of
$15 per item imposed by New York State. Service charges on deposits, another
large source of fee revenue to the Company increased by 6.4% in 1999 as the
result of new customer relationships, both consumer and commercial, and a more
stringent review process over fee waivers.
During 1999, the Company recorded $375 thousand in net security losses as
the result of selected sales of investment securities, principally local
short-term municipal notes, to achieve certain portfolio restructuring goals.
This compares to net losses of $64 thousand in 1998.
Other operating income increased by 123.7% during 1999 as the result of
improvements in several categories, most notably ATM fees, wire transfer fees,
cash management fees and charges, letter of credit fees, annuity commissions and
merchant services income. Excluding the previously mentioned nonrecurring gain
recorded in other operating income during 1999, this category would have
improved by 97% versus 1998. Excluding the growth in ATM fee income, which
resulted in part from the imposition of a surcharge on non-customers at Company
ATMs during 1999, most categories improved due to growth in the Company's
customer base and improved sales of existing products. New products such as a
third-party money market sweep account for business relationships and sales of
variable annuities and
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------36
mutual funds were introduced during 1999. These products are expected to more
meaningfully add to other income in 2000. In addition, continued growth of the
Company's commercial customer base, due largely to the Company's current and
planned branch locations in Suffolk and Queens Counties marketplaces, is also
expected to yield increases in deposit service charges and related fees next
year. The addition of a full-time sales director to the branch banking division,
coupled with formal sales training for branch and lending staff, helped to
improve the cross-sell ratio of various products to existing customers in 1999
as well as to identify prospective customers through ongoing marketing efforts
in local communities.
1998 versus 1997
Other income declined by 6.2% in 1998 versus 1997. This decline was due to
a lower level of service charges on deposit accounts, principally return item
charges, a higher level of net security losses and a nominal reduction in other
operating income. The lower level of service charge income was also due in part
to the loss of several high volume, high maintenance commercial relationships in
1998, coupled with an increase in average demand deposit balances used to cover
service charges.
OPERATING EXPENSES
1999 versus 1998
Operating expenses increased by 13.8% to $20.5 million in 1999 when
compared to 1998. The largest component of the increase was in salaries and
other employee benefits, up $2.0 million or 18.6%, resulting from growth in
staff count, increased health care costs, higher supplementary compensation
accruals, and related increases in 401(k) and employee stock ownership plan
(ESOP) contributions. Also contributing to the growth in expenses during 1999
were more moderate increases in occupancy costs (up 2.3%), equipment expenses
(up 10.0%), marketing and advertising costs (up 9.6%), deposit assessment fees
(up 6.0%) and other operating expenses (up 8.3%). Somewhat offsetting these
increases was a $47 thousand reduction in amortization of intangibles as the
premium paid for deposits acquired in 1992 branch purchases was fully amortized
early in 1998.
Growth in operating expenses during 1999 was well in excess of the level
recorded in 1998 due largely to continued growth in the Company's various lines
of business and the staff and infrastructure necessary to support that growth
and expansion. More than ever, the Company is focused on its targets of
improving the rate of growth in annual non-staff operating expenses to a level
below the prevailing rate of inflation in addition to reducing the operating
efficiency ratio (total operating expenses divided by the sum of fully taxable
equivalent net interest income and other income) to a level below 50%. The
continued expansion of staff and branch facilities in recent years along with
growth in both the lending staff and operational support functions have resulted
in rates of operating expense growth above corporate targets in recent years.
The resultant expansion of the Company's asset and, more importantly, revenue
bases, has more than kept pace.
The Company's primary expense control rates of measurement, relative to
its peer group, are still very competitive. Although expense control is measured
many different ways, the Company focuses on the operating efficiency ratio and
the ratio of operating expenses to average assets as its primary yardsticks. The
Company's operating efficiency ratio improved to 51.7% in 1999 versus 54.4% and
54.8% in 1998 and 1997, respectively. The second measure of expense control
utilized by the Company is total operating expenses to average assets. The
Company recorded ratios of 2.43% in 1999 and 1998 and 2.47% in 1997 in this
category. These ratios all compare very favorably to the Company's peers and
continually place it in the top 15% of its industry peer group. Management of
the Company is very cognizant of expense management and places great emphasis on
control of operating expenses, but always in the context of prudent growth of
profitable lines of business. Management is also aware, however, that the
resources necessary to grow the Company's revenue base must also be made
available in order to improve earnings. Along these lines, management also
monitors the ratio of average assets per employee and, at over $4.3 million per
employee, the Company ranks in the top 10% of its peer group in this category.
This efficient utilization of staff is another reason behind the Company's
excellent record of growth in earnings and assets. Although the Company's staff
count has grown substantially during the past several years, management has
always adhered to the Company founders' original philosophy of "measured,
orderly growth."
Growth in both net interest income and other income are again expected to
outpace increases in operating expenses during 2000, thereby resulting in
anticipated improvements in each of the foregoing expense control ratios next
year. The Company's long-term goal, as stated in previous stockholder
communications, continues to be to reduce its operating efficiency ratio to a
level of 50% or less and to lower the operating expenses to average assets ratio
to 2.25%. While this was a short-term goal for the year 2000, it remains a
long-term objective to continually improve these ratios in both absolute terms
and in relation to the Company's community bank peer group. An analysis of the
components of 1999 operating expenses, by category, follows.
Occupancy expenses totaled $1.8 million in 1999, an increase of 2.3%
versus 1998. This increase resulted principally from higher rental costs and
increased real estate taxes. Normal lease escalations were recorded at several
facilities during 1999, however, these expenses were largely offset by lower
utility costs. During 2000, occupancy costs are expected to increase due to an
expansion of our Jericho Plaza office space to accommodate some additional
centralization of support staff at that facility along with potential branch
expansion in both Suffolk and Queens Counties. Potentially offsetting some of
these additional costs is the anticipated settlement of favorable certiorari
proceedings at two of our branch locations. These settlements
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------37
have been tied up in the Nassau County legislature during the past year but are
expected to be processed during the first half of 2000.
Equipment expenses grew by 10.0% in 1999 due to higher depreciation
expenses and costs related to equipment purchases. Depreciation expense
increased due to purchases of office equipment related to staff expansion,
continued growth and development of the Company's personal computer networks and
the replacement of the Company's mainframe computer during the fourth quarter of
1998. Growth in this category amounted to 22.1% in 1999 and it is expected that
this category will again increase during 2000, though at a lower rate, due to
additional planned technology initiatives during the coming year and equipment
purchases related to anticipated branch openings.
Deposit assessment fees increased by 6.0% as the result of growth in the
Company's assessable deposit base. The majority of the Company's deposits are
insured by the Bank Insurance Fund ("BIF") while the balance is insured by the
Savings Association Insurance Fund ("SAIF"). Currently, the Company's BIF
assessment rate is $0.01 per $100 of deposits while SAIF deposits are assessed
at a rate of $0.06 per $100 of deposits to support the FICO bonds issued by the
FDIC. Based upon year-end 1999 deposit levels and preliminary projections for
2000 deposit growth, management anticipates an increase of approximately 10% in
the Company's 2000 deposit assessment fees.
Amortization of intangibles declined by $47 thousand or 56.8% due to the
final amortization core deposit premiums paid in connection with branches
acquired in 1992 from Anchor Savings Bank. Excluding further acquisition
activity, intangibles amortization will be flat in 2000 versus 1999.
Other operating expenses, including marketing and advertising expenses,
increased by 8.5% to $4.7 million in 1999 when compared to 1998. This increase
resulted from growth in several categories, most notably credit and collection
fees, subsidiary operating expenses, marketing and advertising costs, computer
software maintenance, stationery and supplies costs and audits and examination
fees. The increase in credit and collection costs was the direct result of more
aggressive litigation and collection efforts related to nonperforming assets.
The growth in marketing and advertising costs resulted from expanded use of
local media to support image advertising at the corporate level. Computer
software maintenance cost increases resulted from enhanced product offerings and
licensing of software related to expanded usage of PCs by all Company staff.
Likewise, stationery and supplies and postage expenses increased as the direct
result of an expansion of both the branch network and general business
activities. Audits and examination fees increased due to the ongoing cost of
regulatory examinations. Management of the Company expects that operating
expenses will continue to grow as the Company expands its operations, the
markets it serves and the products it offers. Management anticipates an overall
rate of increase of 7%-9% as a 2000 expense growth estimate.
1998 versus 1997
Operating expenses increased by 7.4% in 1998 to $18.0 million. As was the
case in the 1999 comparison, growth in salaries and other employee benefits was
the principal reason for this increase. An increase in staff count, higher
supplementary compensation accruals and related increases in 401(k) and ESOP
contributions resulted in an 11.7% rise in salaries and benefits expenses during
1998.
Occupancy costs rose by 11.3% in 1998 due principally to the opening of
two branch facilities in late 1997. In addition, the full year impact of
occupying the Jericho Plaza office complex was recorded in 1998. Higher utility
costs and real estate taxes also added to the growth in this expense category
during 1998.
Equipment expenses grew by 18.8% when compared to 1997 due to higher
depreciation expenses and costs related to equipment purchases. Expansion of the
Company's branch network, growth in the Company's personal computer network and
the replacement of the Company's mainframe computer system in 1998 resulted in a
27.5% increase in depreciation expense in 1998.
Deposit assessment fees increased by 12.1% in 1998 as the result of growth
in the Company's assessable deposit base.
Amortization of intangibles declined by $522 thousand or 86.2% in 1998
versus 1997. This decline resulted from the runoff of the core deposit premium
paid in connection with 1992 branch acquisitions.
Other operating expenses, including marketing and advertising expenses,
increased by 7.7% to $4.3 million in 1998 when compared to 1997. This increase
resulted from growth in several categories, mainly marketing and advertising,
computer software maintenance, stationery and supplies, postage, other real
estate expenses and checkbook charges.
EFFECTIVE INCOME TAX RATE
1999 versus 1998
Income tax provisions of $4.4 million, $4.2 million and $3.8 million were
recorded in 1999, 1998 and 1997, respectively. The Company is currently subject
to both a statutory incremental federal tax rate of 35% (34% for the first $10
million of taxable income), and a New York State tax rate of 9%, plus a
surcharge of 17% in 1999 and 1998. The Company's overall effective tax rate was
29.9%, 33.7% and 35.5% in 1999, 1998 and 1997, respectively.
The decline in 1999's effective tax rate was largely due to the full year
impact of the Bank's Delaware subsidiary, SB Portfolio Management Corp., which
was established in June 1998. SB Portfolio provides investment management
services to the Bank and the Company. At year-end 1999, approximately $203
million in Government Agency and tax-exempt municipal securities were managed by
SB Portfolio in Delaware, and consequently the income thereon is exempt from New
York State income taxes. Management of the Company anticipates that the 2000
effective tax rate will approximate 30.0%.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------38
1998 versus 1997
The Company's effective tax rate declined to 33.7% in 1998 from 35.0% in
1997. This decrease was largely due to the establishment of SB Portfolio
Management Corp. in June 1998. Somewhat offsetting the benefits provided by SB
Portfolio was a decline in tax-exempt municipal income resulting from a decline
in the average volume of tax-exempt loans and municipal securities.
CAPITAL RESOURCES
The Company's foundation for successful performance, efficient utilization
of assets and its capacity to grow its assets and earnings largely stem from the
significance of its capital position. The Company strives to maintain an optimal
level of capital, commensurate with its risk profile, on which an attractive
rate of return to stockholders will be realized over both the short and long
term, while serving depositors', creditors' and regulatory needs. In determining
an optimal capital level, the Company also considers the capital levels of its
peers and the evaluations of its primary regulators. During 1999, the Company's
capital foundation was expanded by the amount of its net income earned and
common stock issued net of cash dividends paid to stockholders and shares
repurchased. At December 31, 1999, stockholders' equity totaled $56.1 million, a
decline of $4.8 million from year-end 1998. Total equity at December 31, 1997
was $54.9 million. The application of SFAS No. 115 resulted in a $12.5 million
reduction in stockholders' equity at December 31, 1999 and a $365 thousand
reduction in equity at December 31, 1998. Excluding the impact of this mandated
adjustment, stockholders' equity would have grown by $7.4 million or 12.1% in
1999. Retention of earnings, net of cash dividends paid on common stock, added
$6.9 million to equity last year. Somewhat offsetting this growth was the
repurchase of 50,200 shares of stock as part of the Company's stock repurchase
plan. If market conditions warrant, management will repurchase additional shares
of common stock on the open market during the next twelve months. This action
will only occur if management feels that the purchase will be at prices that are
accretive to earnings per share.
Internal capital generation, defined as earnings less cash dividends paid
on common stock, is the primary catalyst supporting the Company's future growth
of assets and, most importantly, stockholder value. Management constantly
evaluates the Company's capital position in light of current and future growth
objectives. Although the Company did not access either the equity or debt
markets in 1999, management continues to monitor these markets closely.
The Company has no present plans to issue or utilize preferred shares.
These shares do, however, also afford management additional flexibility with
respect to future equity financing to support business expansion.
Management strives to provide stockholders with a competitive return on
their investment in the Company. During 1999, the Board of Directors distributed
quarterly cash dividends on the Company's common stock amounting to $0.51 in
addition to paying a 6% stock dividend. The current quarterly cash dividend rate
is $0.13 per share.
The Company also makes a common stock dividend reinvestment plan available
to its stockholders. This plan allows existing stockholders to reinvest cash
dividends in Company stock and/or to purchase additional shares through optional
cash investments on a quarterly basis. Shares are purchased at a 5% discount
from the current market price under either plan option. During 1999 and 1998,
$761 thousand and $868 thousand, respectively, were added to stockholders'
equity through plan participation. Approximately 22% of the Company's cash
dividends were reinvested in 1999 under this plan, and since inception,
approximately $4.5 million in additional equity has been added through plan
participation. Management anticipates continued future growth in equity through
the program.
State Bancorp, Inc. and its subsidiary are subject to various regulatory
capital requirements administered by the Federal Reserve Board and the Federal
Deposit Insurance Corporation. These regulatory authorities measure capital
adequacy on a risk-weighted assets basis. Their guidelines provide a method of
monitoring capital adequacy that is sensitive to the risk factors inherent in a
bank's asset base, including off-balance sheet exposures. The guidelines assign
various weights to different asset types depending upon their risk profile.
Generally speaking, assets with greater risk require more capital support than
do less risky assets. In addition, a leverage standard has been established to
supplement the risk-based ratios in assessing an institution's overall capital
adequacy. Failure to maintain the Bank's capital ratios in excess of minimum
regulatory guidelines requires bank regulatory authorities to take prompt
corrective action in accordance with the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations
arising from FDICIA established five categories of capitalization for depository
institutions: (1) well-capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized and (5) critically
undercapitalized. Based upon its December 31, 1999 capital position as outlined
in Table II, the Bank's capital ratios far exceed the minimums established for a
well-capitalized institution and exceed, by a significant margin, the minimum
requirements under FDICIA. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a direct effect on the
Company's and the Bank's operations and financial statements. The Company has no
plans or commitments for capital utilization or expenditures that would affect
its current capital position or would impact its future financial performance.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------39
TABLE II
<TABLE>
<CAPTION>
Regulatory
Criteria
Ratios as of December 31, for Well-
Regulatory --------------------------- Capitalized
Minimum 1999 1998 1997 Institution
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Leverage ratio--Tier 1 Capital to Total Adjusted Assets ....... 3.00-5.00% 7.04% 7.98% 7.43% 5.00%
Tier 1 Capital/Risk-Weighted Assets ........................... 4.00% 11.69% 12.64% 12.40% 6.00%
Total Capital/Risk-Weighted Assets ............................ 8.00% 12.91% 13.85% 13.58% 10.00%
- --------------------------------------------------------------------------------------------------------------------------
------
</TABLE>
LIQUIDITY
Liquidity management is defined as the Company's and its subsidiary's
ability to meet their financial obligations on a continuous basis without
material loss or disruption of normal operations. These obligations include the
withdrawal of deposits on demand or at their contractual maturity, the repayment
of borrowings as they mature, the ability to fund new and existing loan
commitments and to take advantage of business opportunities as they arise.
Liquidity is composed of the maintenance of a strong base of core deposits,
maturing short-term assets including cash and due from banks, the ability to
sell marketable assets and access to lines of credit and the capital markets.
Liquidity at the Company is measured and monitored daily, thereby allowing
management to better understand and react to emerging balance sheet trends.
After assessing actual and projected cash flow needs, management seeks to obtain
funding at the most economical cost to the Company. These funds can be obtained
by converting liquid assets to cash or by attracting new deposits or other
sources of funding. Many factors affect the Company's ability to meet its
liquidity needs, including variations in the markets served, loan demand, its
asset/liability mix, its reputation and credit standing in its markets, and
general economic conditions.
The Funds Management Committee is responsible for oversight of the
Company's liquidity position and management of its asset/liability structure.
This Committee monitors the loan and investment portfolios while also examining
the maturity structure and volatility characteristics of the Company's
liabilities to develop an optimum asset/liability mix. Funding sources available
to the Company include retail, commercial and municipal deposits, purchased
liabilities and stockholders' equity. If needed for short-term liquidity
purposes, the Company has access to $16.5 million in unsecured lines of credit
extended by correspondent banks. In addition, the Company can utilize its line
of credit with FHLB to access up to $28.5 million in market rate-funds with
maturities of up to thirty years. The Company does not utilize brokered deposits
as a source of funds nor did it engage in any derivatives activities during 1999
or 1998 to manage its liquidity or interest rate risk.
Asset liquidity is provided by short-term investments and the
marketability of securities available for sale. At December 31, 1999, the
Company had $377 million in such liquid assets. The Company's loan portfolio and
investment securities held to maturity also provide an excellent source of
internal liquidity through maturities and periodic repayments of principal. At
year-end 1999, approximately $282 million of these assets, including
mortgage-backed securities, were due to mature or be repaid within one year.
Cash flows provided by the loan and investment portfolios are typically utilized
to reduce the Company's borrowed funds position and/or to fund loan and
investment securities growth. The Company's operating, investing and financing
activities are conducted within the overall constraints of the Company's
liquidity management policy.
While past performance does not guarantee future results, management
believes that the Company's funding sources, including dividends from its
subsidiary, and the Bank's funding sources will be adequate to meet their future
liquidity requirements.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The process by which financial institutions manage interest-earning assets
and funding sources under different interest rate environments is called
asset/liability management. The primary goal of asset/liability management is to
increase net interest income within an acceptable range of overall risk
tolerance. Management must ensure that liquidity, capital, interest rate and
market risk are prudently managed. Asset/liability and interest rate risk
management are governed by policies reviewed and approved annually by the
Company's Board of Directors. The Board has delegated responsibility for
asset/liability and interest rate risk management to the Funds Management
Committee. The Funds Management Committee meets quarterly and sets strategic
directives that guide the day to day asset/liability management activities of
the Company as well as reviewing and approving all major funding, capital and
market risk management programs. In addition to the Funds Management Committee,
a Management Asset/Liability Committee (ALCO) meets monthly to discuss current
market conditions, balance sheet management strategies, deposit and loan pricing
issues and interest rate risk measurement and mitigation.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
- ------------------------------------------------------------------------------40
INTEREST RATE RISK
Interest rate risk is the risk to earnings or capital arising from
movements in interest rates. This risk can be quantified by measuring the change
in net interest margin relative to changes in market rates. Risk is identified
by reviewing repricing characteristics of interest-earning assets and
interest-bearing liabilities. The Company's Funds Management Committee sets
forth guidelines that limit the level of interest rate risk within specified
tolerance ranges. Management must determine the appropriate level of risk which
will enable the Company to achieve its performance objectives within the
confines imposed by its business objectives and the external environment within
which it operates. Interest rate risk arises from repricing risk, basis risk,
yield curve risk or options risk and is measured using financial modeling
techniques, including quarterly interest rate shock simulations, to measure the
impact of changes in interest rates on earnings for periods up to two years.
These simulations are used to determine whether corrective action may be
warranted or required in order to adjust the overall interest rate risk profile
of the Company. The Company's asset/liability and interest rate risk management
policy limits interest rate risk exposure to +/-12% of base case net income for
net earnings at risk and +/-15% for equity value at risk as a percentage of
market value of portfolio equity. Net earnings at risk is the potential adverse
change in net income arising from a +/-200 basis point change in interest rates,
measured over a one-year time horizon. Equity value at risk is the potential
adverse change in the present value (market value) of total equity arising from
a +/-200 basis point change in interest rates. Simulation results, utilizing the
Sendero asset/liability model, are influenced by a number of estimates and
assumptions with regard to embedded options, prepayment behaviors, pricing
strategies and cash flows. Such assumptions and estimates are inherently
uncertain and, as a consequence, results will neither precisely estimate net
interest income nor precisely measure the impact of higher or lower interest
rates on net interest income.
To mitigate the impact of changes in interest rates, the balance sheet
must be structured so that repricing opportunities exist for both assets and
liabilities in approximately equivalent amounts at basically the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute an interest-sensitivity gap, which is the difference between
interest-sensitive assets and interest-sensitive liabilities. These static
measurements do not reflect the results of any projected activity and are best
utilized as early indicators of potential interest rate exposures. The primary
objectives of the Company's asset/liability management are to continually
evaluate the interest rate risk inherent in the Company's balance sheet; to
determine the level and direction of risk appropriate given the Bank's strategic
focus, operating environment, liquidity requirements and performance objectives;
and to manage this risk in a prudent manner consistent with approved policy.
The accompanying table sets forth the amounts of assets and liabilities
outstanding as of December 31, 1999 which, based upon certain assumptions, are
expected to reprice or mature in each of the time frames shown. Except as
stated, the amount of assets and liabilities shown to reprice or mature within a
particular time frame was determined in accordance with the earlier of the term
to repricing or the contractual terms of the asset or liability. The Company
bases its deposit decay rates on assumptions established by management, which
reflect historical experience over the three years ended December 31, 1999.
Thus, the decay rates for deposit accounts, with the exception of CDs, for which
contractual maturities are readily available, were as follows: 10% per year for
savings deposits; 20% per year for money fund and NOW accounts of individuals,
partnerships and corporations; all money fund and NOW accounts of municipalities
are included in the 0-6 months time frame due to their seasonality and
volatility. Management feels that these decay assumptions reflect the historical
stability of the Company's core deposit base, which may or may not be indicative
of the industry average of its peers.
An asset-sensitive gap indicates an excess of interest-sensitive assets
over interest-sensitive liabilities, whereas a liability-sensitive gap indicates
the opposite. At December 31, 1999, the Company had a one-year cumulative
liability-sensitivity gap of $153 million. In a rising rate environment, a
liability-sensitive gap position generally indicates that increases in expenses
utilized to fund interest-earning assets will outpace increases in interest
income associated with those assets. In addition, the Company's net interest
spread and net income would also decline under this scenario. Conversely, in a
declining interest rate environment, the Company's cost of funds would decline
more rapidly than the yield on its rate-sensitive assets and would likely result
in an expansion of net interest income. This risk can be reduced by various
strategies, including the administration of liability costs and the investment
of asset maturities and cash flows in such a way as to insulate net interest
income from the effects of changes in interest rates. As previously mentioned, a
static gap position is best utilized as a tool for early detection of potential
interest rate exposure. Management's goal is to manage the Company's cumulative
one-year gap such that rate-sensitive assets and liabilities are approximately
equal in that time frame. Due to the nature of the Company's business, primarily
the seasonality of its municipal funding function, an exactly matched one-year
gap is unlikely to occur. Rather, management relies on simulation analysis to
manage the Company's asset/liability position on a dynamic repricing basis.
Simulation modeling applies alternative interest rate scenarios and periodic
forecasts of future business activity to estimate the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in a variety of interest rate
environments. Asset and liability management efforts also may involve the use of
off-balance sheet instruments such as interest rate swaps to minimize risk. The
Company does not utilize swaps or other derivative instruments to manage its
asset/liability position.
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------41
<TABLE>
<CAPTION>
TABLE III (dollars in thousands) Sensitivity Time Horizon
- ------------------------------------------------------------------------------------------------------------------------------------
0-6 6-12 1-5 Over Noninterest-
Months Months Years 5 Years Sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS (1)
Loans (net of unearned income) (2) ....................... $ 311,786 $ 15,767 $ 91,594 $ 64,607 $ 5,194 $ 488,948
Securities purchased under agreements to resell .......... 27,000 -- -- -- -- 27,000
Securities held to maturity .............................. 242 -- 327 -- -- 569
Securities available for sale (3) ........................ 58,658 38,919 44,110 250,286 4,286 396,259
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .......................... 397,686 54,686 136,031 314,893 9,480 912,776
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized net loss on securities available for sale ..... (19,397) -- -- -- -- (19,397)
Cash and due from banks .................................. 37,428 -- -- -- -- 37,428
All other assets (7) ..................................... 7,288 3,165 -- -- 8,569 19,022
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets ........................................... $ 423,005 $ 57,851 $ 136,031 $ 314,893 $ 18,049 $ 949,829
====================================================================================================================================
INTEREST-SENSITIVE LIABILITIES (1)
Savings accounts (4) ..................................... $ 5,249 $ 5,249 $ 94,485 $ -- $ -- $ 104,983
Money fund and NOW accounts (5) .......................... 53,213 4,467 35,734 -- -- 93,414
Time deposits (6) ........................................ 429,955 23,446 19,335 369 -- 473,105
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .......................... 488,417 33,162 149,554 369 -- 671,502
Securities sold under agreements to repurchase
and other short-term borrowings ........................ 83,338 -- -- -- -- 83,338
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ..................... 571,755 33,162 149,554 369 -- 754,840
All other liabilities, equity and demand deposits (7) .... 5,391 471 63 -- 189,064 194,989
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity ........................... $ 577,146 $ 33,633 $ 149,617 $ 369 $ 189,064 $ 949,829
====================================================================================================================================
Cumulative Interest-sensitivity gap (8) .................. $(174,069) $(152,545) $(166,068) $ 148,456 $ 157,936
====================================================================================================================================
Cumulative interest-sensitivity ratio (9) ................ 69.6% 74.8% 78.0% 119.7% 120.9%
Cumulative interest-sensitivity gap as a % of Total Assets (18.3%) (16.1%) (17.5%) 15.6% 16.6%
====================================================================================================================================
</TABLE>
(1) Allocations to specific interest-sensitivity periods are based on the
earlier of the repricing or maturity date.
(2) Nonaccrual loans are shown in the noninterest-sensitive category.
(3) Estimated principal reductions have been assumed for mortgage-backed
securities based upon their current constant prepayment rates.
(4) Savings deposits are assumed to decline at a rate of 10% per year over a
five-year period based upon the nature of their historically stable core
deposit relationships.
(5) Money fund and NOW accounts of individuals, partnerships and corporations
are assumed to decline at a rate of 20% per year over a three-year period
based upon the nature of their historically stable core deposit
relationships. Money fund and NOW accounts of municipalities are included
in the 0-6 months category.
(6) Reflected as maturing in each instrument's period of contractual maturity.
(7) Other assets and liabilities are shown according to their contractual
payment schedule or a reasonable estimate thereof.
(8) Total interest-earning assets minus total interest-bearing liabilities.
(9) Total interest-earning assets as a percentage of total interest-bearing
liabilities.
<PAGE>
Statistical Information
- ------------------------------------------------------------------------------42
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY:
NET INTEREST INCOME AND RATES
The following table presents the average daily balances of the Bank's assets,
liabilities and stockholder's equity, together with an analysis of net interest
earnings and average rates, for each major category of interest-earning assets
and interest-bearing liabilities. Interest and average rates are computed on a
fully taxable-equivalent basis, adjusted for certain disallowed interest expense
deductions, using a tax rate of 34% in 1999, 1998, and 1997. Nonaccruing loans
are included in the average balances (dollars in thousands):
<TABLE>
<CAPTION>
-----------------------------
For the Years Ended December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities held to maturity and
securities available for sale:
Taxable ............................... $274,182 $18,132 6.61% $200,384 $12,778 6.38%
Tax-exempt ............................ 52,868 2,329 4.41 55,279 2,567 4.64
- --------------------------------------------------------------------------------------------------------------
Total Securities .......................... 327,050 20,461 6.26 255,663 15,345 6.00
Federal funds sold, securities
purchased under agreements to
resell and interest-bearing deposits .... 25,543 1,270 4.97 63,021 3,392 5.38
Loans (net of unearned income):
Taxable ................................. 437,233 39,474 9.03 377,095 36,026 9.55
Tax-exempt .............................. 12,845 1,299 10.11 8,513 917 10.77
- --------------------------------------------------------------------------------------------------------------
Total loans--net .......................... 450,078 40,773 9.06 385,608 36,943 9.58
Total interest-earning assets ............. 802,671 $62,504 7.79% 704,292 $55,680 7.91%
Allowance for loan losses ................. (6,648) (5,489)
- --------------------------------------------------------------------------------------------------------------
796,023 698,803
Cash and due from banks ................... 25,803 26,607
Bank premises and equipment--net .......... 3,706 3,545
Other assets .............................. 17,731 11,463
- --------------------------------------------------------------------------------------------------------------
Total Assets .............................. $843,263 $740,418
==============================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Savings and time deposits:
Savings ................................. $215,085 $ 3,709 1.72% $209,528 $ 4,795 2.29%
Time .................................... 358,699 18,197 5.07 312,900 17,155 5.48
- --------------------------------------------------------------------------------------------------------------
Total savings and time deposits ........... 573,784 21,906 3.82 522,428 21,950 4.20
Federal funds purchased ................... 1,474 82 5.53 996 55 5.52
Securities sold under
agreements to repurchase ................ 28,161 1,513 5.30 3,411 191 5.60
Other borrowed funds ...................... 36,126 1,972 5.41 36,105 1,968 5.44
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ........ 639,545 25,473 3.98 562,940 24,164 4.29
Demand deposits ........................... 137,343 115,533
Other liabilities ......................... 5,975 3,238
- --------------------------------------------------------------------------------------------------------------
Total liabilities ......................... 782,863 681,711
Stockholder's equity ...................... 60,400 58,707
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholder's Equity .................... $843,263 $740,418
==============================================================================================================
Net interest income/rate--
tax-equivalent basis .................... 37,031 4.61% 31,516 4.47%
Less tax-equivalent basis adjustment ...... 996 911
- --------------------------------------------------------------------------------------------------------------
Net Interest Income $36,035 $30,605
==============================================================================================================
-----------------------------
<CAPTION>
For the Years Ended December 31, 1997
- ------------------------------------------------------------------------------
Average Average
Balance Interest Rate
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Securities held to maturity and
securities available for sale:
Taxable ............................... $185,763 $12,222 6.58%
Tax-exempt ............................ 56,569 2,746 4.85
- ------------------------------------------------------------------------------
Total Securities .......................... 242,332 14,968 6.18
Federal funds sold, securities
purchased under agreements to
resell and interest-bearing deposits .... 36,366 1,995 5.49
Loans (net of unearned income):
Taxable ................................. 353,244 33,782 9.56
Tax-exempt .............................. 7,929 842 10.62
- ------------------------------------------------------------------------------
Total loans--net .......................... 361,173 34,624 9.59
Total interest-earning assets ............. 639,871 $51,587 8.06%
Allowance for loan losses ................. (5,235)
- ------------------------------------------------------------------------------
634,636
Cash and due from banks ................... 29,667
Bank premises and equipment--net .......... 3,188
Other assets .............................. 10,859
- ------------------------------------------------------------------------------
Total Assets .............................. $678,350
==============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Savings and time deposits:
Savings ................................. $210,808 $ 5,257 2.49%
Time .................................... 273,402 15,187 5.55
- ------------------------------------------------------------------------------
Total savings and time deposits ........... 484,210 20,444 4.22
Federal funds purchased ................... 2,620 154 5.88
Securities sold under
agreements to repurchase ................ 25,680 1,448 5.64
Other borrowed funds ...................... 11,385 644 5.66
- ------------------------------------------------------------------------------
Total interest-bearing liabilities ........ 523,895 22,690 4.33
Demand deposits ........................... 99,251
Other liabilities ......................... 2,622
- ------------------------------------------------------------------------------
Total liabilities ......................... 625,768
Stockholder's equity ...................... 52,582
- ------------------------------------------------------------------------------
Total Liabilities and
Stockholder's Equity .................... $678,350
==============================================================================
Net interest income/rate--
tax-equivalent basis .................... 28,897 4.52%
Less tax-equivalent basis adjustment ...... 923
- ------------------------------------------------------------------------------
Net Interest Income $27,974
==============================================================================
</TABLE>
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------43
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The following table presents a comparative analysis of the changes in the
Bank's interest income and interest expense due to the changes in the average
volume and the average rates earned on interest-earning assets and due to the
changes in the average volume and the average rates paid on interest-bearing
liabilities. Interest and average rates are computed on a fully
taxable-equivalent basis, adjusted for certain disallowed interest expense
deductions, using a tax rate of 34% in 1999, 1998 and 1997. Variances in
rate/volume relationships have been allocated proportionately to average volume
and average rate as they compare to each other (in thousands):
<TABLE>
<CAPTION>
-----------------------------
Year 1999 over 1998 Year 1998 over 1997
------------------------------------------------------------------
Due to Change in: Due to Change in:
------------------ ------------------
Net Net
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities held to maturity and securities available for sale:
Taxable .................................................... $ 4,864 $ 490 $ 5,354 $ 941 $ (385) $ 556
Tax-exempt ................................................. (109) (129) (238) (62) (117) (179)
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities ............................................. 4,755 361 5,116 879 (502) 377
Federal funds sold, securities purchased under agreements
to resell and interest-bearing deposits .................... (1,881) (241) (2,122) 1,435 (38) 1,397
Loans (net of unearned income):
Taxable .................................................... 5,510 (2,062) 3,448 2,279 (35) 2,244
Tax-exempt ................................................. 441 (59) 382 63 12 75
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans--net ............................................. 5,951 (2,121) 3,830 2,342 (23) 2,319
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income ........................................ 8,825 (2,001) 6,824 4,656 (563) 4,093
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings and time deposits:
Savings .................................................... 124 (1,210) (1,086) (32) (430) (462)
Time ....................................................... 2,387 (1,345) 1,042 2,168 (200) 1,968
- ------------------------------------------------------------------------------------------------------------------------------------
Total savings and time deposits .............................. 2,511 (2,555) (44) 2,136 (630) 1,506
Federal funds purchased ...................................... 27 -- 27 (90) (9) (99)
Securities sold under agreements to repurchase ............... 1,330 (8) 1,322 (1,247) (10) (1,257)
Other borrowed funds ......................................... 13 (9) 4 1,350 (26) 1,324
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense ....................................... 3,881 (2,572) 1,309 2,149 (675) 1,474
- ------------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income
(Tax-Equivalent Basis) ..................................... $ 4,944 $ 571 $ 5,515 $ 2,507 $ 112 $ 2,619
====================================================================================================================================
-----------------------------
</TABLE>
INVESTMENT PORTFOLIO
The following table presents the amortized cost of held to maturity and
available for sale securities held by the Company for each reported period (in
thousands):
<TABLE>
<CAPTION>
----------------------
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TYPE:
Obligations of states and political subdivisions $ 89,665 $ 89,285 $ 24,161 $ 24,167 $ 70,517 $ 70,458
Mortgage-backed securities and
collateralized mortgage obligations .......... 23,174 22,420 42,642 42,307 62,517 62,108
Government Agency securities ................... 279,703 261,437 213,274 213,023 153,177 153,288
Corporate securities ........................... 4,286 4,286 2,368 2,368 2,368 2,368
- ------------------------------------------------------------------------------------------------------------------------------
Total .......................................... $396,828 $377,428 $282,445 $281,865 $288,579 $288,222
==============================================================================================================================
----------------------
</TABLE>
<PAGE>
Statistical Information
(continued)
- ------------------------------------------------------------------------------44
The following table presents the maturity distribution and the weighted
average yield of the Company's investment portfolio at December 31, 1999
(dollars in thousands). The yield information does not give effect to changes in
estimated fair value of investments available for sale that are reflected as a
component of stockholders' equity.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Maturing
-------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
----------------- ----------------- ------------------ -----------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE:
Obligations of states and political subdivisions .. $87,232 4.60% $ 327 7.10% $ 1,729 5.02% $ -- --%
Mortgage-backed securities and
collateralized mortgage obligations(2) .......... 9,752 5.55 2,397 5.91 8,430 6.78 1,841 6.15
Government Agency securities(3) ................... -- -- 24,167 6.04 115,220 6.68 122,050 6.79
Corporate securities .............................. -- -- -- -- -- 4,286 6.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total ............................................. $96,984 4.70% $26,891 6.04% $125,379 6.67% $128,177 6.76%
====================================================================================================================================
-------------------------------------------------------------------------------
</TABLE>
(1) Fully tax-equivalent basis using a tax rate of 34%.
(2) Assumes maturity dates pursuant to average lives as determined by constant
prepayment rates.
(3) Assumes coupon yields for securities past their call dates and not bought
at a discount; yields to call for securities not past their call dates and
not bought at a discount; and yields to maturity for securities purchased
at a discount.
LOAN PORTFOLIO
The following table categorizes the Company's loan portfolio for each
reported period (in thousands):
<TABLE>
<CAPTION>
December 31,
--------
- ----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial ... $220,874 $197,601 $172,524 $163,780 $130,617
Real estate--mortgage ....... 216,955 187,740 174,480 160,104 137,067
Real estate--construction ... 25,752 17,165 14,713 13,132 7,798
Loans to individuals ........ 5,738 7,749 7,077 7,526 6,323
Tax-exempt and other ........ 19,709 10,461 8,920 8,841 5,838
- ----------------------------------------------------------------------------------------------
Gross loans ................. 489,028 420,716 377,714 353,383 287,643
Less: unearned income ....... 80 80 80 80 64
- ----------------------------------------------------------------------------------------------
Loans--net of unearned income $488,948 $420,636 $377,634 $353,303 $287,579
==============================================================================================
--------
</TABLE>
The following table presents the maturities of selected loans and the
sensitivities of those loans to changes in interest rates at December 31, 1999
(in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------
One
One Year Through Over
or Less Five Years Five Years Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial ......... $142,893 $ 62,872 $ 15,109 $220,874
Real estate--construction ......... 24,390 1,362 -- 25,752
- ---------------------------------------------------------------------------------------
Total ............................. $167,283 $ 64,234 $ 15,109 $246,626
=======================================================================================
Loans maturing after one year with:
Fixed interest rate ............. $ 24,059 $ 4,568 $ 28,627
Variable interest rate .......... $ 40,175 $ 10,541 $ 50,716
=======================================================================================
-----------------------------------------------
</TABLE>
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------45
The following table presents the Company's nonaccrual, past due and
restructured loans for each reported period (in thousands):
<TABLE>
<CAPTION>
--------
December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ............................................... $5,194(1) $3,676 $4,258 $5,869 $8,247
Loans 90 days or more past due and still accruing interest ..... $ 3 $1,352 $1,590 $1,228 $ 337
Restructured, accruing loans ................................... $ 422 $5,545(1) $7,289(1) $6,524(1) $3,344
Interest income on nonaccrual and restructured loans which would
have been recorded under original loan terms ................. $ 517 $ 910 $1,192 $1,265 $ 837
Interest income on nonaccrual and restructured
loans recorded during the period ............................. $ 74 $ 400 $ 476 $ 263 $ 260
- ------------------------------------------------------------------------------------------------------------------------------------
--------
</TABLE>
(1) Includes one credit totaling $3.5 million at December 31, 1999, $5.0
million at December 31, 1998 and 1997 and $4.7 million at December 31,
1996, which is collateralized by commercial real estate with a current
appraised value in excess of the carrying value of the credit.
SUMMARY OF LOAN LOSS EXPERIENCE
The determination of the balance of the allowance for possible loan losses
is based upon a review and analysis of the Company's loan portfolio and reflects
an amount which, in management's judgement, is adequate to provide for possible
future losses. Management's review includes monthly analysis of past due and
nonaccrual loans and detailed, periodic loan by loan analyses.
The principal factors considered by management in determining the adequacy
of the allowance are the growth and composition of the loan portfolio,
historical loss experience, the level of nonperforming loans, economic
conditions, the value and adequacy of collateral and the current level of the
allowance. While management utilizes all available information to estimate the
adequacy of the allowance for loan losses, the ultimate collectibility of a
substantial portion of the loan portfolio and the need for future additions to
the allowance will be based upon changes in economic conditions and other
relevant factors.
The following table presents an analysis of the Company's allowance for
possible loan losses for each reported period (dollars in thousands):
<TABLE>
<CAPTION>
------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 ........................................ $5,788 $5,124 $5,009 $5,004 $4,929
- ----------------------------------------------------------------------------------------------------------------------
Charge-offs:
Commercial and industrial ............................... 593 1,332 1,509 1,018 777
Real estate--mortgage ................................... 987 197 379 445 239
Real estate--construction ............................... 500 -- -- -- --
Loans to individuals .................................... 45 128 169 132 133
Loans to others ......................................... -- -- -- -- 45
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs ......................................... 2,125 1,657 2,057 1,595 1,194
- ----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and industrial ............................... 204 214 189 79 52
Real estate--mortgage ................................... 223 297 23 14 6
Loans to individuals .................................... 17 10 10 7 11
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries .......................................... 444 521 222 100 69
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs ........................................... 1,681 1,136 1,835 1,495 1,125
Additions charged to operations ........................... 3,000 1,800 1,950 1,500 1,200
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of period .................................. $7,107 $5,788 $5,124 $5,009 $5,004
======================================================================================================================
Ratio of net charge-offs during the period to average loans
outstanding during the period ........................... 0.37% 0.29% 0.51% 0.48% 0.43%
======================================================================================================================
------
</TABLE>
<PAGE>
Statistical Information
(continued)
- ------------------------------------------------------------------------------46
The following table presents the allocation of the Company's allowance for
possible loan losses for each reported period (in thousands):
<TABLE>
<CAPTION>
---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
1999 Loans 1998 Loans 1997 Loans 1996 Loans 1995 Loans
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Industrial $3,725 45.2% $3,320 47.0% $2,210 45.7% $2,452 46.4% $1,972 45.4%
Real estate--mortgage ... 1,572 44.4 1,633 44.6 1,790 46.2 1,658 45.3 1,746 47.7
Real estate--construction 644 5.3 675 4.1 499 3.9 423 3.7 43 2.7
Loans to individuals .... 36 1.1 47 1.8 82 1.9 143 2.1 158 2.2
Tax exempt and other .... 144 4.0 67 2.5 50 2.3 51 2.5 70 2.0
Unallocated ............. 986 -- 46 -- 493 -- 282 -- 1,015 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total ................... $7,107 100.0% $5,788 100.0% $5,124 100.0% $5,009 100.0% $5,004 100.0%
==================================================================================================================================
---------------
</TABLE>
DEPOSITS
The following table presents the average balance and the average rate paid
on the Company's deposits for each reported period (dollars in thousands):
<TABLE>
<CAPTION>
------------------
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ................................................. $137,343 --% $115,533 --% $ 99,251 --%
Interest-bearing transaction accounts ........................... 40,800 1.06 34,269 1.66 38,033 2.00
Money market deposit accounts ................................... 65,952 1.26 67,096 1.93 64,746 2.15
Savings deposits ................................................ 108,333 2.26 108,163 2.71 108,029 2.88
Time certificates of deposit of $100,000 or more ................ 273,141 5.02 223,749 5.41 181,856 5.58
Other time deposits ............................................. 85,558 5.02 89,151 5.46 91,546 5.50
- -------------------------------------------------------------------------------------------------------------------------------
Total ........................................................... $711,127 3.05% $637,961 3.41% $583,461 3.50%
===============================================================================================================================
------------------
</TABLE>
The following table sets forth, by time remaining to maturity, the
Company's certificates of deposit of $100,000 or more, at December 31, 1999 (in
thousands):
--------
- --------------------------------------------------------------------------------
3 months or less ................................................... $333,173
Over 3 months through 6 months ..................................... 15,788
Over 6 months through 12 months .................................... 3,889
Over 12 months ..................................................... 2,751
- --------------------------------------------------------------------------------
Total .............................................................. $355,601
================================================================================
--------
RETURN ON EQUITY AND ASSETS
The following table presents the Company's return on average stockholders'
equity and assets, the dividend payout ratio and the average equity to average
assets ratio for each reported period. The calculations are based on recorded
assets and give effect to the changes in fair value of securities available for
sale.
------
1999 1998 1997
- --------------------------------------------------------------------------------
Return on total average assets ............. 1.23% 1.11% 1.05%
Return on total average stockholders' equity 17.35% 14.16% 13.76%
Dividend payout ratio ...................... 33.43% 40.77% 37.56%
Average equity to average assets ........... 7.07% 7.83% 7.61%
- --------------------------------------------------------------------------------
------
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------47
SHORT-TERM BORROWINGS
The following information is provided on the Bank's short-term borrowings
for each reported period (dollars in thousands):
<TABLE>
<CAPTION>
---------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31--
Securities sold under agreements to repurchase ................... $ 26,888 $ 34,529 $ 14,818
Federal funds purchased .......................................... $ 16,450 $ -- $ 6,000
Federal Home Loan Bank advances .................................. $ 40,000 $ 25,000 $ 47,000
Term borrowing--broker ........................................... $ -- $ 10,000 $ --
- -------------------------------------------------------------------------------------------------------------
Weighted average interest rate on Balance, December 31--
Securities sold under agreements to repurchase ................... 5.89% 6.09% 6.29%
Federal funds purchased .......................................... 6.30% -- 7.00%
Federal Home Loan Bank advances .................................. 5.53% 5.49% 6.08%
Term borrowing--broker ........................................... -- 4.85% --
- -------------------------------------------------------------------------------------------------------------
Maximum outstanding at any month end--
Securities sold under agreements to repurchase ................... $100,485 $ 34,529 $ 79,680
Federal funds purchased .......................................... $ 16,450 $ 8,000 $ 15,500
Federal Home Loan Bank advances .................................. $ 40,000 $ 45,000 $ 47,000
Term borrowing--broker ........................................... $ 10,000 $ 10,000 $ --
- -------------------------------------------------------------------------------------------------------------
Average daily amount outstanding--
Securities sold under agreements to repurchase ................... $ 28,161 $ 3,411 $ 25,680
Federal funds purchased .......................................... $ 1,474 $ 996 $ 2,620
Federal Home Loan Bank advances .................................. $ 27,304 $ 27,393 $ 11,385
Term borrowing--broker ........................................... $ 8,822 $ 8,712 $ --
- -------------------------------------------------------------------------------------------------------------
Weighted average interest rate on average daily amount outstanding--
Securities sold under agreements to repurchase ................... 5.30% 5.60% 5.64%
Federal funds purchased .......................................... 5.53% 5.52% 5.88%
Federal Home Loan Bank advances .................................. 5.48% 5.50% 5.66%
Term borrowing--broker ........................................... 4.85% 4.85% --
- -------------------------------------------------------------------------------------------------------------
---------
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA (dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income ............................. $13,723 $14,410 $16,015 $17,360 $13,920 $13,367 $13,365 $14,117
Interest expense ............................ 5,223 5,477 6,787 7,986 6,734 5,810 6,170 5,450
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income ......................... 8,500 8,933 9,228 9,374 7,186 7,557 7,195 8,667
Provision for possible loan losses .......... 750 750 750 750 450 450 450 450
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses .................. 7,750 8,183 8,478 8,624 6,736 7,107 6,745 8,217
Other income ................................ 497 572 552 525 407 352 373 401
Operating expenses .......................... 4,978 4,994 5,105 5,375 4,490 4,457 4,446 4,574
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes .................. 3,269 3,761 3,925 3,774 2,653 3,002 2,672 4,044
Provision for income taxes .................. 1,020 1,192 1,170 1,018 918 1,048 880 1,322
- --------------------------------------------------------------------------------------------------------------------------------
Net income .................................. $ 2,249 $ 2,569 $ 2,755 $ 2,756 $ 1,735 $ 1,954 $ 1,792 $ 2,722
================================================================================================================================
Basic earnings per common share(1) .......... $ 0.33 $ 0.36 $ 0.40 $ 0.39 $ 0.25 $ 0.29 $ 0.26 $ 0.39
================================================================================================================================
Diluted earnings per common share(1) ........ $ 0.32 $ 0.36 $ 0.39 $ 0.39 $ 0.25 $ 0.28 $ 0.25 $ 0.39
================================================================================================================================
--------------------------------------
</TABLE>
(1) Retroactive recognition has been given for stock dividends and splits.
<PAGE>
Market Data
- ------------------------------------------------------------------------------48
The following is a three-year comparison of dividends and stock prices:
-------
1999 1998 1997
- --------------------------------------------------------------------------------
Annual cash dividends(1) ......................... $ 0.50 $ 0.49 $ 0.40
Annual stock dividends/stock split issued ........ 6% 5% 20%
- --------------------------------------------------------------------------------
-------
(1) Retroactive recognition has been given for stock dividends and splits.
Effective January 28, 1999, the Company's common stock began trading on
the American Stock Exchange under the symbol STB. For the years ended December
31, 1998 and 1997, the Company's common stock traded on the Nasdaq(R) Small-Cap
market under the symbol STBC. The approximate high and low closing bid prices
for the years ended December 31, 1999, 1998, and 1997 were as follows:
--------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1999
High Bid ................. 18 1/4 16 5/8 16 5/8 15 5/16
Low Bid .................. 16 14 5/8 14 5/8 14 1/8
--------------------------------------------------
1998
High Bid ................. 25 3/4 22 3/4 21 18
Low Bid .................. 22 19 1/2 18 15 1/2
1997
High Bid ................. 16 1/2 18 1/2 20 5/8 26 7/8
Low Bid .................. 12 1/2 14 15 20 1/8
- --------------------------------------------------------------------------------
<PAGE>
Board of Directors and Executive Officers STATE BANCORP, INC. AND SUBSIDIARY
Effective March 1, 2000
- ------------------------------------------------------------------------------49
STATE BANCORP, INC. AND
STATE BANK OF LONG ISLAND
Board of Directors
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
State Bancorp, Inc. and
State Bank of Long Island
Gary Holman
Vice Chairman of the Board
State Bancorp, Inc. and
State Bank of Long Island
Partner, Lamb & Barnosky, LLP
J. Robert Blumenthal
President, Harwyn Enterprises, Inc.
Carl R. Bruno
Chief Financial Officer, DiFazio Electric, Inc.
Arthur Dulik, Jr.
Chief Financial Officer, Altana, Inc.
Richard W. Merzbacher
President, State Bank of Long Island
Vice Chairman, State Bancorp, Inc.
Joseph F. Munson
Chairman, TRM International, Inc.
John F. Picciano
Attorney
Daniel T. Rowe
President, State Bancorp, Inc.
Vice Chairman, State Bank of Long Island
Suzanne H. Rueck
Manager, New Hyde Park Inn
STATE BANCORP, INC.
Officers
Office of the Chairman
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
Daniel T. Rowe
President
Richard W. Merzbacher
Vice Chairman
Brian K. Finneran
Secretary/Treasurer
STATE BANK OF LONG ISLAND
Executive Officers
Office of the Chairman
Thomas F. Goldrick, Jr.
Chairman and Chief Executive Officer
Richard W. Merzbacher
President
Daniel T. Rowe
Vice Chairman
Frederick C. Braun, III
Executive Vice President and
Senior Lending Officer
Brian K. Finneran
Executive Vice President and
Chief Financial Officer
<PAGE>
State Bank of Long Island--Officers
Effective March 1, 2000
- ------------------------------------------------------------------------------50
Financial Group
Theresa DiVittorio, C.P.A.
First Vice President & Comptroller
Philip J. Nardella, C.P.A.
Vice President & Assistant Comptroller
Thomas C. Padden
Vice President
Carol J. Bergmann
Assistant Vice President and
Assistant Secretary
Mary Ann P. DiLorenzo
Assistant Vice President
Steven Karaman
Assistant Manager
Bank Operations/Facilities
Raymond D. Wagner
First Vice President
Maureen McTiernan
Assistant Vice President
Blanche E. Stanford
Manager
Jennie DiFilippi
Manager
Valerie Stewart
Assistant Manager
Management Information
Systems and Data Processing
Susanne Pheffer
Senior Vice President
Diane T. Beck
Vice President
Joseph M. McNeill
Vice President
Janine M. Specht
Manager
Jon Montana
Assistant Manager
Nathan Jones
Administrative Assistant
Frank Power
Administrative Assistant
Human Resources
Mary E. Durkin
Vice President and Director of
Human Resources and Training
Marketing
John McWhirk
Vice President and Director of
Marketing and Product Development
Scott Burkhardt
Administrative Assistant
Branch Administration
Thomas A. Arnone
Senior Vice President
Robert J. Connors
Vice President
Douglas W. Vergith
Vice President
Kevin J. Carroll
Assistant Vice President
Joseph Rainone
Manager
Elizabeth A. Zona
Manager
Cara Maloney
Assistant Manager
Lisa A. Pandolfo
Assistant Manager
Robert Burke, Jr.
Administrative Assistant
Western District
Philip Straub
Vice President and District Manager
New Hyde Park Branch
Philip Straub
Vice President
Lucille N. Jessen
Manager
Rosemary A. DiMario
Assistant Manager
Rina Miletic
Assistant Manager
Helen Kroner
Administrative Assistant
Garden City South Branch
Paul R. Cronen
Manager
Debbie Hartman
Assistant Manager
Rockville Centre Branch
Ann Goulding
Manager
Barbara Nilsen
Assistant Manager
Central District
Rocco Reda
Vice President and District Manager
Farmingdale Branch
Peter J. Yovine
Vice President
Catherine R. Lingstuyl
Assistant Manager
Denise Cummings
Administrative Assistant
Jericho Branch
Stephen N. Pedersen
Manager
Lisa Ramos-Lopez
Assistant Manager
Eftihia Karachalios
Assistant Manager
Oyster Bay Branch
Diane E. Grochocki
Manager
Mary Alfo
Administrative Assistant
Eastern District
Rosalie Mottola
Vice President and District Manager
Hauppauge Branch
John J. Kurek
Vice President
Robert Insalaco
Assistant Manager
Margaret Virigilio
Administrative Assistant
Huntington Branch
Karen M. Williams
Assistant Vice President
Karen Papsidero
Manager
Helen M. Gilfedder
Assistant Manager
MacArthur Branch
Iris Taibbi
Assistant Vice President
Clare M. O'Shaughnessy
Assistant Manager
Sharon Klinkhardt
Administrative Assistant
Municipal Finance
Robert J. Valli
Senior Vice President and Director of
Municipal Finance and Community Relations
Kenneth A. Messina
First Vice President
John P. Rom
Vice President
Hazel F. McCord
Assistant Manager
<PAGE>
STATE BANCORP, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------51
Commercial Lending Group
Charles A. Hoffman
Senior Vice President
Robert J. Nicols
Senior Vice President
Kenneth M. Scheriff
Senior Vice President
William H. Tucker
Senior Vice President
Jean-ann Yngstrom
Senior Vice President
George K. DeHaven
First Vice President
Fred A. Heruth
First Vice President
James Lacchini
First Vice President
Jeffrey N. Barber
Vice President
James T. Burns
Vice President
Patrick M. Demery
Vice President
Kevin T. Hennessy
Vice President
Stephen B. Mischo
Vice President
Richard J. O'Brien
Vice President
Michael O'Leary
Vice President
Michael P. Sabala
Vice President
Thomas Scott Swain
Vice President
Geraldine Harden
Assistant Vice President
Lori D. Keller
Assistant Vice President
Jeffrey B. Reid
Assistant Vice President
Karyn F. Rodriguez
Assistant Vice President
Maria Billiris
Commercial Loan Manager
Daniel Lehan
Commercial Loan Manager
Anne N. Dragovcic
Assistant Manager
Robert Friedrich
Assistant Manager
Christopher Van Bell
Assistant Manager
Carol Golde
Administrative Assistant
Joan Kuehne
Administrative Assistant
David Scott Linfoot
Administrative Assistant
Barbara Paradise
Administrative Assistant
Joseph Sacco
Assistant Manager
Stacey Wickham
Administrative Assistant
Consumer Loan Department
Jean M. Cassese
Vice President
John J. McEniry
Assistant Vice President
Loan Operations Group
Siu Chan
Manager
Patricia Salvatore
Administrative Assistant
Office of the Chairman
Janice Sanders
Assistant Secretary
SB Portfolio Management Corp.
SB Financial Services Corp.
Matthew T. Novak
President and Director
<PAGE>
State Bancorp, Inc. and Subsidiary Advisory Board
- ------------------------------------------------------------------------------52
Henry Alpert, Secretary
Spartan Petroleum Corp.
Andrew C. Andron, President
Century 21 Andron Realty
Maureen Appel, Headmistress
Connelly School of the Holy Child
Marvin Buchner, President
Council Commerce Corp.
Salvatore Catania, Secretary
Murray M. Braunstein, Inc.
Angelo Francis Corva, President
Angelo Francis Corva & Associates
Anthony J. Demasco, CPA, Partner
Demasco, Sena & Jahelka
Monroe Diefendorf, Jr., President
Diefendorf Capital Planning Associates
Debbie C. Eichen, CPA
Eichen & DiMeglio, P.C.
Fred H. Fellows, President
Fibre Materials Co., Inc.
Ronald F. Friedenthal
Independent Insurance Broker
Frank Giorgio, Jr., Esq.
Giorgio & DePoto
George Goettelmann, Jr., President
A. E. Goettelmann & Co.
Kermit Gordon
Kermit Enterprises
Henry P. Greve, CPA
Greve, Schmidt & Trageser, P.C.
Joseph M. Gunning, President
Gunning Business Machines
Anne S. Hadlock, CPA, Partner
Stanley, Marks & Co., LLP
Jean A. Hegler, Attorney
Brosnan & Hegler, Attorneys
Edward Heil
Independent Network Group
Conrad P. Homler, CPA
Seymour Katchen, CPA
Palmetto, Mollo & Co.
Michael Katz, President
Decor Moulding & Supply
Robert F. Kearns Executive Vice President
B. H. Aircraft Company, Inc.
Owen Kilgannon, CPA
Kilgannon, Furey, Dufek & Company
Carol Konner, President
Konner Development Corp.
Patrick McAllister
Great Eastern Printing Co.
Gerard J. McKeon, Retired
The New York Racing Association
Frederick J. Meyer, Chairman
Mariculture Technologies, Inc.
Robert E. Meyer
Robert E. Meyer Real Estate Appraisals
Donald Monti, President
Concorde Management
Dominick Nuzzi
Allegiance Van Lines, Inc.
John J. Nuzzi
Nuzzi Fuel Co.
Peter N. Paternostro, CPA, Partner
Rynkar, Paternostro & Co., LLP
Charles Peluso, CPA
Margolin, Winer & Evens
Joseph Provenzano, President
Long Island Floors, Inc.
Charles W. Schwing, Consultant
Schwing Electrical Supply Corp.
Fred Scott, Chairman
State Bank of Long Island
Advisory Board
Ralph Somma, Executive Vice President
Brueton Industries, Inc.
Charles I. Steinberg, President
Financial Pacesetters, Inc.
Jerome Stubenhaus, CLU
Nassau Radiologic Group, P.C.
Jeffrey S. Wilks
Spiegel Associates
<PAGE>
Corporate Information STATE BANCORP, INC. AND SUBSIDIARY
EXECUTIVE OFFICES
699 Hillside Avenue
New Hyde Park, NY 11040-2512
Tel: (516) 437-1000
Fax: (516) 437-1032
2 Jericho Plaza
Jericho, NY 11753-1683
Tel: (516) 465-2300
Fax: (516) 465-6700
ANNUAL MEETING OF STOCKHOLDERS
State Bancorp, Inc.'s Annual Stockholders' Meeting will be held on Tuesday,
April 18, 2000 at 10:00 a.m. at the New Hyde Park Inn, New Hyde Park, NY.
INVESTOR RELATIONS
Stockholders, security analysts and others seeking information about State
Bancorp, Inc. should contact Brian K. Finneran, Executive Vice President and
Chief Financial Officer at (516) 465-2251.
Copies of the Company's earnings releases and other financial publications,
including the Annual Report on Form 10-K filed with the Securities and Exchange
Commission, are available without charge upon written request to:
Theresa DiVittorio
First Vice President and Comptroller
State Bank of Long Island
699 Hillside Avenue
New Hyde Park, NY 11040-2512
STOCK LISTING
State Bancorp, Inc. is traded on the American Stock Exchange under the symbol
STB. Price information appears in the Wall Street Journal, New York Times and
other newspapers under StateBcp.
STOCKHOLDER ACCOUNT INQUIRIES
To expedite changes of address or registration, consolidation of accounts and
the replacement of stock certificates or dividend checks, stockholders should
contact the Company's registrar and transfer agent directly:
Norwest Shareowner Services
161 North Concord Exchange
South St. Paul, MN 55075
(800) 468-9716
FDIC RULES AND REGULATIONS,
PART 350.4(d)
This statement has not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1700 Market Street
Philadelphia, PA 19103-3984
COUNSEL
Lamb & Barnosky, LLP
534 Broadhollow Road
Melville, NY 11747-9034
<PAGE>
[LOGO] STATE BANK OF LONG ISLAND
BRANCH LOCATIONS
MAIN OFFICE
699 Hillside Avenue
New Hyde Park, NY 11040-2512
(516) 437-1000
(516) 465-2200
135 South Street
Oyster Bay, NY 11771-2283
(516) 922-0200
339 Nassau Boulevard
Garden City South, NY 11530-5313
(516) 481-3900
Lincoln Plaza
2 Lincoln Avenue
Rockville Centre, NY 11570-5724
(516) 678-6000
501 North Broadway
Jericho, NY 11753-2107
(516) 822-4000
580 East Jericho Turnpike
Huntington Station, NY 11746-7378
(631) 271-5900
740 Veterans Memorial Highway
Hauppauge, NY 11788-1231
(631) 979-0700
4250 Veterans Memorial Highway
Holbrook, NY 11741-4001
(631) 630-0500
27 Smith Street
Farmingdale, NY 11735-1022
(631) 847-3900
LENDING FACILITY
Two Jericho Plaza
Jericho, NY 11753-1683
(516) 465-2300
INTERNET ADDRESS
www.statebankofli.com
TOUCH 24--24 HOUR TELEPHONE BANKING
(631) 421-7900
SUBSIDIARY LOCATIONS
SB Portfolio Management Corp.
1403 Foulk Road, Suite 102
Wilmington, DE 19803
(302) 479-5936
SB Financial Services Corp.
1403 Foulk Road, Suite 102
Wilmington, DE 19803
(302) 479-7534
SB ORE Corp.
699 Hillside Avenue
New Hyde Park, NY 11040
(516) 465-2200
New Hyde Park Leasing Corporation
699 Hillside Avenue
New Hyde Park, NY 11040
(516) 465-2200
EXHIBIT (23)
INDEPENDENT AUDITORS' CONSENT
DELOITTE & TOUCHE LLP
1700 Market Street
Philadelphia, Pennsylvania 19103-3984
Telephone (215) 246-2300
Facsimile (215) 569-2441
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-15167 and No. 33-82172 of State Bancorp, Inc. on Forms S-8 of our report
dated January 28, 2000, appearing in this Annual Report on Form 10-K of State
Bancorp, Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000723458
<NAME> STATE BANCORP INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,216,796
<INT-BEARING-DEPOSITS> 211,675
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0
0
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</TABLE>
